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) is a special group of financial companies. Its main part is CLS Bank, located in New York. CLS started working in 2002. It runs a unique global system called the CLS System. This system helps banks safely exchange different currencies.

The CLS System is very important for the foreign exchange market, also known as forex or FX. This is where people and banks trade different currencies. Even though the forex market is spread out, banks that use CLS can avoid a big problem called settlement risk. This risk happens when one side of a currency trade pays, but the other side doesn't. CLS helps prevent this by making sure both sides of a trade happen at the same time.

CLS proved how valuable it was during the 2008 financial crisis and the COVID-19 pandemic in 2020. During these tough times, the forex market stayed stable. The CLS System greatly reduces the risk of losing money in currency trades.

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 currency trades were done. Back then, banks would often pay one currency and then wait days to receive the other. This meant they might pay out money but never get the money they were supposed to receive. This risk became known as "Herstatt risk" or foreign exchange settlement risk. It was a risk of losing money or not having enough cash.

Similar problems happened again after other banks failed in the 1980s and 1990s. These events made it clear that a better system was needed for exchanging currencies safely.

How CLS Was Created

After these problems, central banks from major countries, like the Bank for International Settlements (BIS), started looking for solutions. They formed groups to study how to make international payments safer. Several important reports were written, pushing for a new system. These reports highlighted the need for banks to find ways to reduce risks in currency trading.

In 1994, a group of 20 large international banks came together. They wanted to find a common solution to reduce the risks in foreign exchange. By 1996, they agreed on an idea: a special bank that would make sure both sides of a currency trade happened at the same time. This is why it's called "Continuous Linked Settlement."

On July 1, 1997, these banks officially started CLS Services Ltd in the UK. Many banks joined as shareholders to help fund the project. Building the system was complex and expensive. In November 1999, CLS Bank International was set up in New York.

CLS Bank officially began operations on September 9, 2002. It started by settling seven major currencies: the Australian dollar, Canadian dollar, euro, Japanese Yen, Swiss franc, Pound sterling, and US dollar.

CLS Grows Over Time

Since 2002, CLS has added more currencies to its system. In September 2003, it added the Danish krone, Norwegian krone, Singapore dollar, and Swedish krona. More currencies followed in the next years, including the Hong Kong dollar, South Korean won, New Zealand dollar, South African rand, Israeli shekel, Mexican peso, and Hungarian forint.

CLS has become very important. By March 2017, it was settling over half of all global foreign exchange transactions. Because of its importance, the Financial Stability Oversight Council in the US officially called CLS a "systemically important financial market utility" in 2012. This means it's vital for the stability of the financial system.

CLS has set records for the amount of money settled in a single day. On December 15, 2021, it settled US$15.4 trillion. On July 5, 2022, it settled 3.2 million trades in one day. The number of banks and clients using CLS has also grown a lot since it started.

How CLS Is Organized

Legal Structure

CLS Group has a special structure with parts in different countries. The main company, CLS Group Holdings AG, is in Lucerne, Switzerland. This company owns CLS UK Intermediate Holdings Ltd in London. In turn, the UK company owns two main parts: CLS Bank International in the U.S. and CLS Services Ltd in the UK. CLS Services helps CLS Bank with its daily work. CLS also has small offices in Japan and Hong Kong.

Shareholders

CLS Group is owned by banks, but it doesn't aim to make a profit for its owners. It works more like a cooperative. Its shareholders, which are banks from many countries, have a say in how it's run. However, they don't get dividends (money paid out from profits) or see their shares increase in value from earnings. As of 2022, CLS had 79 banks as shareholders.

Supervision and Oversight

Even though CLS Group Holdings AG is a Swiss company, the Federal Reserve in the United States watches over it. The Federal Reserve also supervises CLS Bank International as a bank. Central banks from all the countries whose currencies CLS settles also help oversee CLS. They work together to make sure CLS is safe and stable. The CLS Oversight Committee, made up of these central banks, was formed in 2009 to do this.

As of 2022, this committee has 23 members. These include the central banks for the 18 currencies CLS settles, plus five other major European central banks.

Leadership

The main management team for CLS Bank is based in New York. The company has had several leaders over the years, including CEOs and chairs of its boards. The current CEO of CLS Group and CLS Bank is Marc Bayle de Jessé, who started in December 2019. The current chair of the boards is Gottfried Leibbrandt, who started in June 2022.

How CLS Works

CLS offers a service called "payment versus payment" (PvP). This service helps banks avoid settlement risk when they exchange currencies. CLS Bank connects to the payment systems of different countries. It has accounts at their central banks. This allows CLS to make and receive payments in various currencies.

CLS runs a global system that makes sure both sides of a currency trade happen at the same time. It uses a mix of PvP settlement, local payment systems, and a process called "multilateral netting." This all happens with a strong and reliable computer system.

In a PvP system, the payments for both sides of a currency trade are settled at the exact same moment. Without PvP, there's a serious risk that one bank pays the currency it owes but doesn't receive the currency it bought. This is the "settlement risk" or "Herstatt Risk" we talked about earlier.

Here's how CLS works each day:

• Banks send their currency trade instructions to CLS.
• CLS checks and matches these instructions.
• The CLS daily settlement cycle runs for five hours. During this time, all the payment systems in the countries involved are open. This allows for the simultaneous exchange of currencies.
• Each bank using CLS has one account that holds all its different currencies.
• At the start and end of each day, a bank's account with CLS usually has a zero balance.
• CLS holds accounts with the central banks for each currency it settles.
• When all checks are done, CLS settles the trades. It makes the payments final and irreversible by moving money between the banks' accounts at CLS.

For example, imagine three banks trading currencies:

• Bank 1 buys British Pounds (GBP) from Bank 2 and sells US Dollars (USD).
• Bank 2 buys Euros (EUR) from Bank 3 and sells USD.
• Bank 3 buys GBP from Bank 1 and sells EUR.

Instead of each bank making many separate payments, CLS uses "multilateral netting." This means CLS figures out the total amount each bank needs to pay or receive in each currency. This greatly reduces the number of payments needed. For example, if Bank 1 owes USD1500 and is supposed to receive USD1500, its net payment is zero.

This netting process is very efficient. On average, CLS reduces the amount of cash banks need to transfer by about 96%. This saves banks a lot of money and makes the system run smoothly.

CLS also uses something called an "in/out swap." This is a quick, temporary trade that happens before the main settlement. It helps to further reduce the amount of money banks need to pay into CLS. This means that the actual cash needed for settlement is less than 1% of the total value of all trades.

CLS Currencies

CLS has grown to settle many different currencies. As of mid-2022, it settles 18 currencies:

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

Shareholders

As of mid-2024, CLS Group had 75 banks as shareholders. These banks come from all over the world:

See also

• SWIFT