CLS

CLS, for Continuous Linked Settlement, is the piece of financial infrastructure built to stop foreign exchange trades from half-settling. It was created by the FX industry after central banks spent the 1990s pressing banks to fix the exposure known as Herstatt risk, and it began operations in 2002. In the first half of 2025 it settled an average of $7.9 trillion a day across 18 currencies, which makes it, by value, one of the largest settlement systems in the world.

The mechanism

An FX trade has two legs in two currencies, historically settled in two different countries’ payment systems on two different clocks. CLS collapses that gap. Both legs settle simultaneously across accounts at CLS Bank in a daily window, on the strict condition that neither completes without the other: payment versus payment. A counterparty can still fail, but it can no longer keep your currency after failing to deliver its own; the principal, the full value of the trade, is protected.

The liquidity design is as important as the risk design. CLS multilaterally nets each member’s funding obligation across all its trades, so members deliver only their net position in each currency through that currency’s RTGS system. The netting means the cash that moves is a small fraction of the gross value settled, which is what makes settling trillions a day physically possible. It is a working example of multilateral netting and PvP operating together: net the funding, link the legs.

The edges of the umbrella

CLS protects what it covers, and its coverage has edges. Eighteen currencies qualify; most emerging-market currencies do not, so the corridors where settlement is already hardest are also the ones settling without PvP protection. Both sides of a trade need access, direct membership or third-party participation through a member. And the daily settlement cycle fits some flows better than others, which is why same-day and increasingly compressed securities-driven FX flows have pushed CLS to examine its cut-offs as markets moved to T+1.

The uncovered remainder is not small. BIS analysis of the 2022 triennial survey estimated that roughly a third of deliverable FX turnover, around $2.2 trillion a day at the time, settled without PvP protection. Fifty years after Herstatt, the risk CLS was built to remove still exists everywhere the umbrella does not reach, which is why settlement risk remains a live design problem rather than a solved one.