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The CLS Bank: a solution to the risks of international payments settlement?

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Author Info

  • Charles M. Kahn
  • William Roberds

Abstract

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 (“Continuous Linked Settlement”) 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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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2000-15.

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Date of creation: 2000
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Handle: RePEc:fip:fedawp:2000-15

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Keywords: Risk ; Payment systems ; Foreign exchange;

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References

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  1. Richard K. Lyons, 2006. "The Microstructure Approach to Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 026262205x.
  2. Richard K. Lyons., 1997. "Profits and Position Control: A Week of FX Dealing," Research Program in Finance Working Papers RPF-273, University of California at Berkeley.
  3. David L. Roscoe, III, 1998. "Continuous linked settlement," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 32-27.
  4. Herbert L. Baer & Virginia Grace France & James T. Moser, 1995. "Determination of collateral deposits by bilateral parties and clearinghouses," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 525-546.
  5. James T. Moser, 1994. "Origins of the modern exchange clearinghouse: a history of early clearing and settlement methods at futures exchanges," Working Paper Series, Issues in Financial Regulation 94-3, Federal Reserve Bank of Chicago.
  6. Lyons, Richard K., 1997. "A simultaneous trade model of the foreign exchange hot potato," Journal of International Economics, Elsevier, vol. 42(3-4), pages 275-298, May.
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Cited by:
  1. Jamie McAndrews & Antoine Martin, 2007. "Liquidity saving mechanisms," 2007 Meeting Papers 165, Society for Economic Dynamics.
  2. Andreas M. Fischer & Angelo Ranaldo, 2008. "Does FOMC News Increase Global FX Trading?," Working Papers 2008-09, Swiss National Bank.
  3. Robert A. Eisenbeis, 2006. "Home country versus cross-border negative externalities in large banking organization failures and how to avoid them," Working Paper 2006-18, Federal Reserve Bank of Atlanta.
  4. Martin, Antoine & McAndrews, James, 2010. "A study of competing designs for a liquidity-saving mechanism," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1818-1826, August.
  5. Cornelia Holthausen & Cyril Monnet, 2003. "Money and payments: a modern perspective," Working Paper Series 245, European Central Bank.
  6. Enghin Atalay & Antoine Martin & James McAndrews, 2008. "The welfare effects of a liquidity-saving mechanism," Staff Reports 331, Federal Reserve Bank of New York.

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