The CLS Bank: A Solution to the Risks of International Payments Settlement?Foreign exchange transactions are subject to a unique type of settlement risk. This risk ultimately stems from the difficulty of coordinating separate settlements in two different currencies. Settlement of foreign exchange transactions through the proposed CLS (quot;Continuous Linked Settlementquot;) Bank has been discussed as a potential solution to this problem. This paper describes the CLS proposal and analyzes the incentives it places on banks engaged in foreign exchange transactions. The analysis shows that while settlement through the CLS Bank may represent an improvement over current arrangements, some important problems associated with foreign exchange settlements will remain. |
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$1 million $1M CB Funds 100M CB Funds Bank Assets Liabilities Bank B Assets Bank B's Bank for International Bank of Atlanta Bank of Japan bank's CB Funds Bank CB Funds Liabilities CLS arrangement CLS Bank Assets CLS proposal CLS settlement CLS system compliance Continuous Linked Settlement counterparty Currency Sub Accts current arrangements current system day t+1 DBLT default Delivers Reneges Drexel Burnham Lambert due from Bank due from CLS due to Bank ex post example Federal Reserve Bank foreign exchange markets foreign exchange trades foreign exchange transactions forex swap Funds CLS Bank Herstatt incentives initial asset initial pay-in International Settlements Invest and Deliver Jamie McAndrews liquidity providers ments Nash equilibrium Nuffield College obligations overdraft participants party Pay-In Bank payment system penalties PvP system rangements RTGS systems settlement failures Settlement of Spot settlement risk short currency short position spot trade sub-account true netting arrangement U.S. dollars