CLS Group
| Company type | Consortium |
|---|---|
| Industry | Financial services |
| Founded | July 1997 |
| Headquarters | New York City , United States |
Area served | Worldwide |
Key people | Marc Bayle de Jessé (CEO) |
| Products | Foreign exchange settlement platform (CLS System) |
| Parent | CLS Group Holdings AG |
CLS Group—an acronym for Continuous Linked Settlement and commonly referred to as CLS—is a dedicated financial market infrastructure consortium, with its primary institution being the New York-headquartered CLS Bank. Established in July 1997 and commencing operations in 2002, CLS manages a worldwide multicurrency cash settlement platform called the CLS System, which plays a vital role within the foreign exchange market (forex or FX). Given that the forex market operates without a centralized exchange or clearinghouse, entities utilizing CLS reduce settlement risk by leveraging its central netting capabilities (both bilateral and multilateral clearing) alongside a gross payment versus payment settlement process. This framework interfaces directly with the real-time gross settlement systems of affiliated jurisdictions via accounts held at their respective central banks.
The effectiveness of CLS’s risk reduction was notably demonstrated during the 2008 financial crisis, where it ensured stable forex functioning amid intense systemic pressures, as well as during the market disruptions caused by the COVID-19 pandemic in early 2020. While the CLS System’s payment versus payment approach does not completely eradicate forex settlement risk, it substantially diminishes that risk for participating currencies.
Background
The inception of CLS traces back to the 1974 collapse of Germany's Herstatt Bank, an event that revealed the counterparty risk inherent in the multilateral netting systems then used for forex settlements. Following Herstatt’s failure, gross funds transferred via that system plunged by approximately 60% within three days. The fundamental problem lay in settling each side of a forex trade separately, often with timing mismatches, exposing banks to the danger of disbursing currency without receiving the corresponding counter-currency—a phenomenon termed "Herstatt risk" or foreign exchange settlement risk, encompassing both credit risk and liquidity risk. Similar vulnerabilities resurfaced after the failures of institutions such as Drexel Burnham Lambert, Bank of Credit and Commerce International, and Barings Bank later in the century.
Creation
To address these concerns, the Bank for International Settlements (BIS) convened committees composed of G10 central banks aiming to mitigate settlement risk, leading to the establishment of the Committee on Payment and Settlement Systems (CPSS) in 1990. Several influential reports laid the groundwork for CLS:
- The 1989 "Angell Report" examined international financial netting frameworks.
- The 1990 "Lamfalussy Report" defined minimum criteria for cross-border netting arrangements and central bank oversight.
- The 1993 "Noël Report" reviewed central bank services related to cross-border payments without endorsing any particular model.
- The 1996 "Allsopp Report" documented historical settlement failures and encouraged private sector initiatives, paving the way for CLS.
Initial projects such as FXNet, ECHO, and Multinet attempted to net forex trades but lacked direct access to central bank currencies and faced scalability issues. Although CLS was a private-sector initiative propelled by central bank encouragement through CPSS, its complexity necessitated BIS involvement to proceed. In October 1994, senior leaders from major global banks formed a "group of 20" (G20) tasked with developing a solution. By January 1996, consensus was reached on establishing a clearing bank employing a payment versus payment system that allowed simultaneous settlements—the foundation for CLS.
By early 1997, G20 members agreed that CLS would operate using central bank accounts within existing real-time gross settlement infrastructures but maintain physical offices solely in the US, UK, and Japan to minimize expenses. This approach required new legislation and extended operational hours in certain jurisdictions.
On , CLS Services Ltd was incorporated in the UK as the legal vehicle for the project; participating banks each contributed USD 1 million amid escalating development costs from an initial estimate of $40 million. By July 1998, ownership comprised 60 shareholders across 14 countries with commitments totaling $160 million. On , following approval from the Federal Reserve, CLS Bank International was established as a New York-based Edge Act financial institution.
Collaboration between CLS and rival platforms FXNet, ECHO, and Multinet led to their acquisition by CLS Services in December 1997. ECHO ceased operations in April 1999, while Multinet was dissolved in May 2000. IBM was chosen in April 1998 to develop CLS’s technological infrastructure. Operations commenced on , initially settling seven principal currencies including the US dollar, euro, and Japanese Yen.
Lawrence M. Sweet from the Federal Reserve Bank of New York significantly contributed to CLS’s development through his roles as secretary and chair of CPSS committees and chaired the CLS Oversight Committee from its inception until June 2018.
Subsequent Expansion
The initial group of seven currencies was broadened in September 2003 to incorporate the Danish krone, Norwegian krone, Singapore dollar, and Swedish krona. Further additions followed in December 2004 with the inclusion of the Hong Kong dollar, South Korean won, New Zealand dollar, and South African rand. The Israeli shekel and Mexican peso joined in May 2008, while the Hungarian forint was added in November 2015.
Since its establishment in 2002, CLS has experienced significant growth, handling just over half of global foreign exchange settlements by March 2017. This expansion prompted the FSOC to classify CLS as a systemically important financial market utility in July 2012.
CLS achieved a single-day settlement milestone of US$15.4 trillion on 15 December 2021 and reached a record volume of 3.2 million transactions on 5 July 2022.
From its original 39 members, CLS's network grew to encompass 79 shareholders by September 2017, which included 66 settlement members and more than 24,000 third-party clients.
Legal Framework
To reflect the agreement among central banks, CLS Group functions through multiple entities located in various countries. Since 2001, the parent company has been CLS Group Holdings AG, headquartered in Lucerne, Switzerland. This holding company owns CLS UK Intermediate Holdings Ltd based in London, originally founded as CLS Services Ltd in 1997 and renamed in 1999. This London-based entity oversees two primary subsidiaries: CLS Bank International, a U.S. Edge Act corporation, and CLS Services Ltd, a UK-registered firm that delivers operational support to CLS Bank and affiliated organizations. Additionally, CLS maintains corporate entities in Japan and Hong Kong.
Ownership
Operating as a commercial organization on a not-for-profit basis akin to the Depository Trust & Clearing Corporation, CLS Group’s shareholders possess governance rights without entitlement to dividends or appreciation from retained earnings. By 2022, the shareholder group comprised 79 banks representing various jurisdictions.
Regulatory Oversight
Although incorporated in Switzerland, CLS Group Holdings AG falls under the regulatory jurisdiction of the Federal Reserve as a bank holding company within the United States. The Federal Reserve also supervises CLS Bank International as a banking institution. According to the oversight model established by the 1990 Lamfalussy Report, central banks issuing currencies settled through CLS—excluding the US dollar—participate in supervisory activities without formal regulatory control. The Federal Reserve Board, supported by the Federal Reserve Bank of New York, acts as the lead supervisor in coordination with other central banks. Established in 2009 and governed by a 2015 Protocol, the CLS Oversight Committee consists of 23 members: central banks representing all 18 currencies settled by CLS plus five national central banks from the Eurosystem that are G10 members (Belgium, France, Germany, Italy, and the Netherlands).
Executive Management
Headquartered in New York, CLS Bank’s leadership has transitioned through several CEOs since 2000: Joseph De Feo (2000–2005), Rob Close (2005–2010), Alan Bozian (2010–2012), David Puth (2012–2019), and Marc Bayle de Jessé (from 2019 onward).
The chairmanship of the boards for both CLS Group and CLS Bank has been held by Suzanne Labarge (2001–2003), Fritz Klein (2003–2005), Mark Garvin (2005–2007), Gerard Hartsink (2007–2014), Ken Harvey (2014–2022), and Gottfried Leibbrandt (since 2022).
Operations
CLS provides a payment versus payment (PvP) settlement platform designed to minimize settlement risk associated with foreign exchange transactions conducted by its members and their clients. CLS Bank interfaces directly with the real-time gross settlement (RTGS) systems across various participating countries, maintaining accounts at their respective central banks. This is typically facilitated through legislation that exempts CLS from local establishment mandates. Its connections encompass systems such as Fedwire (United States), T2 (Eurozone), CHAPS (United Kingdom), SIC (Switzerland), RITS (Australia), KRONOS (Denmark), CHATS (Hong Kong), BOJ-NET (Japan), among others.
The institution operates a global multi-currency cash settlement framework that integrates PvP mechanisms across CLS central bank accounts, local RTGS infrastructures, and employs multilateral payment netting supported by robust technological systems.
Within a PvP arrangement, payment instructions from both parties involved in an FX transaction are settled simultaneously. This approach eradicates the danger that one participant might deliver currency without receiving the corresponding counter-currency—a risk commonly referred to as settlement risk or “Herstatt Risk.” This concern prompted the 1995 Bank for International Settlements' recommendation of PvP settlement, eventually leading to the establishment of CLS Bank International by G20 member banks.
Settlement participants submit verified payment instructions to CLS following their FX deals. The daily settlement process takes place during a fixed five-hour interval when all RTGS systems across CLS currency jurisdictions are operational, allowing for concurrent settlement of payments on both sides of an FX transaction.
Each participant maintains a single multi-currency account with CLS, which is designed to begin and conclude each business day with a zero balance under standard operating conditions. Members provide instructions for their own trades as well as those involving third parties. CLS holds corresponding accounts at each central bank whose currencies it processes.
On designated settlement days, after conducting stringent risk assessments, CLS executes simultaneous settlements of matched payment instructions by debiting and crediting members’ accounts accordingly. These settlements are definitive and irreversible.
For illustration, given GBP/USD=1.50 and EUR/USD=1.25:
- Transactions:
- Member 1 purchases 1,000 GBP/USD from Member 2
- Member 2 purchases 1,000 EUR/USD from Member 3
- Member 3 purchases 1,000 GBP/USD from Member 1
- Currency exposures:
- Member 1 owes USD1500 and GBP1000, receives USD1500 and GBP1000
- Member 2 owes USD1250 and GBP1000, receives EUR1000 and USD1500
- Member 3 owes USD1500 and EUR1000, receives USD1250 and GBP1000
- Multilateral netting outcomes:
- Member 1’s net payment and receipt equal zero
- Member 2 pays GBP1000, receives EUR1000 plus USD250
- Member 3 pays USD250 and EUR1000, receives GBP1000
These payment obligations are settled through each participant’s multi-currency account.
A notable advantage lies in liquidity optimization achieved through multilateral payment netting. Leading financial institutions process hundreds or thousands of trades daily; CLS computes net funding requirements so members transfer only the net amounts per currency rather than gross trade volumes. The typical netting efficiency averages around 96%.
Furthermore, an in/out swap mechanism is executed prior to the settlement window to alleviate payment demands and liquidity strain. This involves an intraday pair of offsetting FX transactions: one leg settles within CLS to reduce net positions; the other settles outside the system.
This technique reduces payment obligations by approximately 75%, thereby lowering CLS’s funding needs to under 1% of the total gross settlement value.
CLS currencies
As of mid-2022, CLS facilitates settlement in the following currencies:
By mid-2024, CLS Group's shareholder base comprised 75 entities, predominantly leading global banks regulated under European banking authorities. Notable shareholders include:
- Absa Bank
- ANZ Banking Group, Commonwealth Bank of Australia, Macquarie Bank, National Australia Bank, Westpac Banking Corporation
- Banco Bilbao Vizcaya Argentaria, Banco Santander, Bayerische Landesbank, BNP Paribas, Coöperatieve Rabobank, Crédit Agricole Corporate and Investment Bank, Commerzbank, Deutsche Bank, DZ Bank, ING Bank, Intesa Sanpaolo, KBC Bank, National Bank of Greece, Natixis, Nordea Bank, Société Générale, UniCredit SpA
- Banco Monex
- Bank Hapoalim, Bank Leumi
- Bank of America, BNY Mellon, Citibank, Citadel Securities, Goldman Sachs, JPMorgan Chase, Morgan Stanley & Co. International, Northern Trust, State Street Bank and Trust Company, Wells Fargo Bank
- Bank of China (Hong Kong)
- Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank
- Barclays Bank plc and its UK branches, HSBC, Lloyds Bank, National Westminster Bank and NatWest Markets, Nomura International, Santander UK, Standard Chartered Bank
- Danske Bank
- DBS Bank, Oversea-Chinese Banking Corporation, United Overseas Bank
- DNB ASA (DNB Bank)
- FirstRand Bank, Nedbank, Standard Bank of South Africa
- KEB Hana Bank, Kookmin Bank, Shinhan Bank
- Daiwa Securities Group Inc., Mitsubishi UFJ Trust and Banking Corporation, Mizuho Financial Group including Mizuho Bank and MUFG Bank, Norinchukin Bank, Sumitomo Mitsui Banking Corporation and Trust Bank
- Skandinaviska Enskilda Banken (SEB), Svenska Handelsbanken, Swedbank
- UBS AG and UBS Switzerland AG along with Zürcher Kantonalbank
- NatWest Markets
- HypoVereinsbank (UniCredit Bank GmbH)
- Reserve Bank of New Zealand