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CLS Bank: Managing Foreign Exchange Settlement Risk

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In the foreign exchange market, where average daily turnover is in trillions of dollars and trades span time zones, legal systems, and domestic payments systems, participants take on various risks. The most serious risk is credit risk - the risk that one party will fail to pay. Central banks, private sector financial institutions, and domestic payments systems operators laboured for more than a decade to develop a multi-currency settlement system to deal with these risks. The result, the CLS Bank, began operations in September 2002. It virtually eliminates the credit risk inherent in foreign exchange transactions by providing a payment-versus-payment arrangement for settlement. The CLS Bank is regulated by the Federal Reserve Board in consultation with the central banks that have currencies settling through its system. At present there are seven currencies, including the Canadian dollar. The Bank of Canada acts as banker for the CLS Bank, providing it with a settlement account and making and receiving payments on its behalf through the Large Value Transfer System. With the participation and support of the world's largest foreign-exchange-dealing institutions, and growing membership, the CLS Bank has the potential to become the dominant global mechanism for settling foreign exchange transactions.

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  • Paul Miller & Carol Ann Northcott, 2002. "CLS Bank: Managing Foreign Exchange Settlement Risk," Bank of Canada Review, Bank of Canada, vol. 2002(Autumn), pages 13-25.
  • Handle: RePEc:bca:bcarev:v:2002:y:2002:i:autumn02:p:13-25
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    Cited by:

    1. Heinrich, Gregor, 2006. "Operational risk, payments, payment systems, and implementation of Basel II in Latin America : recent developments," MPRA Paper 47420, University Library of Munich, Germany.
    2. Gregor Heinrich, 2006. "Riesgo operacional, pagos, sistemas de pago y aplicación de Basilea II en América Latina: evolución más reciente," Boletín, Centro de Estudios Monetarios Latinoamericanos, vol. 0(4), pages 191-204, Octubre-d.
    3. Nellie Zhang, 2015. "Changes in Payment Timing in Canada’s Large Value Transfer System," Staff Working Papers 15-20, Bank of Canada.
    4. 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.
    5. Fuchun Li & Héctor Pérez Saiz, 2016. "Measuring Systemic Risk Across Financial Market Infrastructures," Staff Working Papers 16-10, Bank of Canada.
    6. Wall, Larry D. & Eisenbeis, Robert A. & Frame, W. Scott, 2005. "Resolving large financial intermediaries: Banks versus housing enterprises," Journal of Financial Stability, Elsevier, vol. 1(3), pages 386-425, April.

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