Papers The ten-year evolution of CLS: Enhancing financial stability and mitigating foreign exchange settlement risk

Foreign exchange (FX) is the world’s most global and liquid asset class, with its efficiency as a market derived in part from the effective management of risk. Within this broad category, it is settlement risk that is the most significant risk faced by the FX industry, the same specific concern that led directly to the creation of CLS in 2002. Over the last ten years, CLS has seen a significant change in terms of what the market requires of it. Arguably, this is most visible in the FX volumes that CLS settles, the number of members and currencies, and the rise in third-party participation. CLS now has 63 Settlement Members, and settles in 17 currencies, compared with 39 Settlement Members and seven currencies at launch. Since the 2008 financial crisis, third-party participation in CLS has expanded: it now has more than 9,000 active third parties. At launch, CLS planned for daily settlement volumes of 45,000; in January 2013, it saw a record volume of nearly 2.6 million instructions settled in a day. CLS is an example of how financial market participants have cooperated to mitigate settlement risk in the FX market, with the result that it settles on average between US$4.5 and 5 trillion every working day.