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Settlement risk in foreign exchange markets and CLS Bank

Author

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  • Gabriele Galati

Abstract

In September 2002, CLS Bank, a new financial institution set up to reduce the risk involved in settling foreign exchange transactions, began operation. This article describes how settlement risk arises, and how central banks and market participants have tried to reduce it. After reviewing the initiatives taken over the last two decades, the article discusses the background to the formation of CLS Bank and its likely effect on relevant risks.

Suggested Citation

  • Gabriele Galati, 2002. "Settlement risk in foreign exchange markets and CLS Bank," BIS Quarterly Review, Bank for International Settlements, December.
    • Handle: RePEc:bis:bisqtr:0212f
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    Citations

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    Cited by:

    1. Raphael Auer & Codruta Boar & Giulio Cornelli & Jon Frost & Henry Holden & Andreas Wehrli, 2021. "CBDCs beyond borders: results from a survey of central banks," BIS Papers, Bank for International Settlements, number 116.
    2. Tsuyuguchi, Yosuke & Wooldridge, Philip D., 2008. "The evolution of trading activity in Asian foreign exchange markets," Emerging Markets Review, Elsevier, vol. 9(4), pages 231-246, December.
    3. Fujiki, Hiroshi & Green, Edward J. & Yamazaki, Akira, 2008. "Incentive efficient risk sharing in a settlement mechanism," Journal of Economic Theory, Elsevier, vol. 142(1), pages 178-195, September.
    4. Harvey, Rachel, 2013. "The legal construction of the global foreign exchange market," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 343-354.
    5. Michael R. King & Carol Osler & Dagfinn Rime, 2011. "Foreign exchange market structure, players and evolution," Working Paper 2011/10, Norges Bank.
    6. Claudio Borio, 2007. "Change and Constancy in the Financial System: Implications for Financial Distress and Policy," RBA Annual Conference Volume (Discontinued), in: Christopher Kent & Jeremy Lawson (ed.),The Structure and Resilience of the Financial System, Reserve Bank of Australia.
    7. Marco Cipriani & Linda S. Goldberg & Gabriele La Spada, 2023. "Financial Sanctions, SWIFT, and the Architecture of the International Payments System," Staff Reports 1047, Federal Reserve Bank of New York.
    8. Fischer, Andreas M. & Ranaldo, Angelo, 2011. "Does FOMC news increase global FX trading?," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2965-2973, November.
    9. Morten Bech, 2012. "FX volume during the financial crisis and now," BIS Quarterly Review, Bank for International Settlements, March.
    10. Richard S.Grossman, 2016. "Banking Crises," Wesleyan Economics Working Papers 2016-001, Wesleyan University, Department of Economics.
    11. Raphael Auer & Philipp Haene & Henry Holden, 2021. "Multi-CBDC arrangements and the future of cross-border payments," BIS Papers, Bank for International Settlements, number 115.
    12. Marc Glowka & Thomas Nilsson, 2022. "FX settlement risk: an unsettled issue," BIS Quarterly Review, Bank for International Settlements, December.
    13. Ranaldo, Angelo & Somogyi, Fabricius, 2021. "Asymmetric information risk in FX markets," Journal of Financial Economics, Elsevier, vol. 140(2), pages 391-411.
    14. Singleton,John, 2010. "Central Banking in the Twentieth Century," Cambridge Books, Cambridge University Press, number 9780521899093.
    15. Morten Bech & Jhuvesh Sobrun, 2013. "FX market trends before, between and beyond Triennial Surveys," BIS Quarterly Review, Bank for International Settlements, December.
    16. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    17. Robert Lindley, 2008. "Reducing foreign exchange settlement risk," BIS Quarterly Review, Bank for International Settlements, September.

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