CLS Group facts for kids

Quick facts for kids
CLS Group

CLS Bank is headquartered at One Financial Square (center) in Lower Manhattan
Industry	Financial services
Founded	July 1997
Headquarters	Lucerne (holding), New York (bank)
Area served	18 currency jurisdictions

CLS Group (which stands for Continuous Linked Settlement), or just CLS, is a special group that helps banks around the world exchange money safely. Its main part is the CLS Bank, located in New York. It started working in 2002.

CLS runs a unique system called the CLS System. This system helps settle deals in the foreign exchange market. This market is where different countries' money (like US dollars and Euros) is traded. Even though this market is huge and spread out, CLS helps banks avoid a big problem called settlement risk. This risk happens when one bank sends money but doesn't receive the money it's supposed to get back. CLS helps prevent this by making sure both sides of a trade happen at the same time.

CLS proved how important it is during big financial problems, like the financial crisis of 2007–2008 and the COVID-19 pandemic in 2020. It helped keep the foreign exchange market stable. While CLS doesn't completely remove all risks, it makes them much, much smaller for the currencies it handles.

History of CLS

Why CLS Was Needed

CLS was created because of a big problem that happened in 1974. A German bank called Herstatt Bank failed. This showed a major risk in how banks traded money across countries. Back then, banks would often send money in one currency and wait days to get the other currency back. If a bank failed during this waiting time, the other bank could lose a lot of money. This problem became known as "Herstatt risk". It's like paying for something online, but the seller's shop closes before you get your item.

This risk worried central banks (like the US Federal Reserve). They wanted to find a way to make sure that when banks traded currencies, both sides of the deal happened at the exact same time.

How CLS Was Created

After the Herstatt problem, important groups like the Bank for International Settlements (BIS) started looking for solutions. They formed committees to study the problem of international money transfers. These groups wrote several important reports. These reports suggested ways to make currency trading safer.

One key idea was "payment versus payment" (PvP). This means that the two parts of a currency trade (like sending US dollars and receiving Euros) happen at the same moment. This way, neither bank is left waiting and risking a loss.

In 1994, big international banks formed a group to work on a solution. They decided to create a special bank that would use the PvP idea. This bank would be called CLS Bank. It would connect directly to the central banks in different countries. This was a very complex project, but central banks pushed for it.

On July 1, 1997, the banks officially set up CLS Services Ltd in the UK. Many banks joined as shareholders to help pay for the project. In November 1999, CLS Bank International was officially created in New York.

CLS also bought out other smaller projects that were trying to solve the same problem. This helped CLS become the main solution. Finally, on September 9, 2002, CLS Bank started its operations. It began by settling trades in seven major currencies, including the US dollar, Euro, and Japanese Yen.

CLS Grows Over Time

Since 2002, CLS has added more currencies to its system. It started with seven and now handles 18 different currencies from around the world. This includes the Danish krone, Singapore dollar, Hong Kong dollar, and Mexican peso.

CLS has become very important. By 2017, it was settling over half of all global foreign exchange trades. Because of its importance, the US government officially recognized CLS as a "systemically important financial market utility" in 2012. This means it's a vital part of the financial system.

CLS handles huge amounts of money every day. On December 15, 2021, it settled a record US$15.4 trillion in one day! It also handles millions of trades daily. Many banks and their customers use CLS to make their currency trades safe.

How CLS Is Organized

CLS Structure

CLS Group is set up in a special way, with parts in different countries. The main company, CLS Group Holdings AG, is in Switzerland. This company owns CLS UK Intermediate Holdings Ltd in London. This UK company then owns CLS Bank International in the US and CLS Services Ltd in the UK. This structure helps CLS work with central banks around the world.

Who Owns CLS

CLS Group is owned by many banks from different countries. It's run like a public service, not to make a profit for its owners. This means that while banks own shares, they don't get money back from CLS like they would from a regular company. Instead, they benefit from the safe and efficient service CLS provides. As of 2022, 79 banks are shareholders of CLS.

Watching Over CLS

Because CLS is so important, it is carefully watched and regulated. The Federal Reserve in the United States is the main overseer of CLS Group and CLS Bank. This means they make sure CLS follows all the rules and stays safe.

Central banks from all the countries whose currencies CLS settles also help watch over it. They work together to make sure CLS is always working correctly and safely.

CLS Leaders

The main leaders of CLS Bank work in New York. The CEO (Chief Executive Officer) is like the head manager. Since December 2019, the CEO of CLS Group and CLS Bank has been Marc Bayle de Jessé.

How CLS Works

CLS offers a "payment versus payment" (PvP) service. This service helps banks and their customers avoid settlement risk when they trade currencies. Remember "Herstatt Risk"? CLS was created to solve that problem.

Here's how it generally works:

• Connecting to Central Banks: CLS Bank is connected to the payment systems of central banks in all the countries whose currencies it settles. This allows CLS to move money directly and quickly.
• Sending Instructions: When banks agree to trade currencies, they send their payment instructions to CLS. CLS checks these instructions to make sure they match.
• Settlement Window: CLS has a special five-hour window each day. During this time, all the payment systems in the countries involved are open. This allows CLS to settle trades at the same time.
• Simultaneous Settlement: CLS makes sure that both sides of a currency trade happen at the exact same moment. For example, if Bank A is sending US dollars and receiving Euros from Bank B, CLS makes sure Bank A gets the Euros at the same instant Bank B gets the US dollars. This prevents either bank from losing money if the other side fails.
• One Account: Each bank that uses CLS has one multi-currency account with CLS. At the start and end of each day, this account usually has a zero balance.
• Final and Irrevocable: Once CLS settles a trade, it's final. The payments cannot be undone.

Making It Efficient: Netting

Banks often have many currency trades each day. Instead of settling each trade separately, CLS uses something called "multilateral payment netting". Imagine you owe your friend $10, but your friend owes you $8. Instead of two separate payments, you just pay your friend $2.

CLS does this for banks. It adds up all the money a bank needs to pay and all the money it needs to receive in each currency. Then, the bank only has to send or receive the final, smaller amount. This makes the process much more efficient and reduces the amount of cash banks need to move around. On average, CLS reduces the amount of money needed by about 96%.

There's also something called an "in/out swap". This is another way CLS helps banks reduce the amount of money they need to send. It further cuts down the payment amounts by about 75%. This means banks only need to send a tiny fraction (less than 1%) of the total value of their trades through CLS.

CLS Currencies

CLS has grown to settle trades in 18 different currencies. Here are the currencies CLS handles as of mid-2022:

Country/entity	Symbol	Currency
Australia	AUD	Australian dollar
Canada	CAD	Canadian dollar
Denmark	DKK	Danish krone
Eurozone	EUR	Euro
Hong Kong	HKD	Hong Kong dollar
Hungary	HUF	Hungarian forint
Israel	ILS	Israeli new shekel
Japan	JPY	Japanese yen
Mexico	MXN	Mexican peso
New Zealand	NZD	New Zealand dollar
Norway	NOK	Norwegian krone
Singapore	SGD	Singapore dollar
South Africa	ZAR	South African rand
South Korea	KRW	South Korean won
Sweden	SEK	Swedish krona
Switzerland	CHF	Swiss franc
United Kingdom	GBP	Pound sterling
United States	USD	United States dollar

See also

• SWIFT