Continuous Linked Settlement
Continuous Linked Settlement ( English permanently linked settlement ) is banking the name of a parent, as a clearinghouse institutionalized clearing and settlement system , the world of financial institutions is used. It eliminates the mutual fulfillment risks betweenthe banks and helps to reduce the risks of advance payments .
prehistory
Global interbank trade is characterized by large-volume banking transactions in foreign exchange , securities and derivatives . These transactions consist of mutual delivery and payment “ step by step ” on the day of performance . On that day, the fulfilling bank trusts in its own performance that the other side (counterparty) will also provide its consideration . The risk that one of the two services does not materialize and that one's own service has already been provided is called the performance risk. A large number of bank failures , in particular the Herstatt Bank in June 1974, brought this fulfillment risk to the fore in the discussion. On June 26, 1976, the Cologne-based Herstatt Bank was forbidden by the German banking authorities to make payments after 4:15 p.m. CET . This even affected those currency trading transactions for which the Herstatt Bank itself had already received the counter-performance. At that time, the business day in New York City had just begun, and at least 12 Herstatt partner banks had made irrevocable payments of an estimated $ 200 million; however, because of the time difference, they no longer received the consideration due. The closure of the Herstatt banking house was the first - but not the last - and most spectacular case of a bank collapse, in which incompletely processed foreign exchange transactions led to serious problems in the payment and settlement systems. This risk hit the German KfW in particular , which on September 15, 2008 transferred around 319 million euros to Lehman Brothers from a foreign exchange swap , when it was already known to be bankrupt. The consideration due from Lehman Brothers in the amount of 500 million US dollars did not initially materialize and KfW ultimately had to post 1/3 as a loss .
The risk that one party to a currency trading transaction will pay off the currency it has sold without receiving the currency it has purchased is known as the settlement risk in currency trading transactions or the “ Herstatt risk ”. This applies to all other underlyings . In 1995 the Bank for International Settlements presented a solution based on the principle of “payment against payment” to solve the problem of the fulfillment risk of asynchronous settlement . As a further development of this approach, the G20 banks founded a special-purpose financial institution , CLS Bank International, in July 1997 .
founding
After years of preparatory work, the 20 leading foreign exchange trading banks founded the CLS Bank in New York in July 1997 and institutionalized the system of Continuous Linked Settlement with it . The mutual performance risk of the market participants is eliminated by the principle of "payment against payment". The new bank installed the world's first settlement system in order to eliminate the mutual settlement risk in the foreign exchange market with initially 17 currencies. These currencies represent around 94% of the world's daily foreign exchange volume. After numerous tests, the bank was put into operation on September 9, 2002 with 39 members and 7 currencies. In February 2009 there were 62 active settlement members and 4,576 third parties using the system. According to its own statements, the CLS Bank accounted for 68% of the global foreign exchange market, which resulted in a daily volume of over 5 trillion US dollars processed by the bank in March 2012.
Planned as a monofunctional institute, from 2008 it will also process credit derivatives and other tradable financial instruments . The CLS Bank operates in New York as a foreign bank (so-called " edge corporation ") under the financial supervision of the Federal Reserve Bank of New York .
functionality
Continuous Linked Settlement is a continuous settlement process that is based on the simultaneous transfer of both parts of the settlement to the two contractual partners. Instead of mutually exchanging payments bilaterally in a trading transaction, each counterparty, for example in a foreign exchange spot transaction , provides the payment obligation to a multi-currency account at the CLS Bank . This ensures that the two services are performed in accordance with the contract, i.e. that they match ( English matching principle ). The CLS-Bank centralizes the mutual, previously decentralized contractual services with simultaneous synchronization of the fulfillment times. The asynchronicity of the mutual fulfillment times results both from the different payment times and from possible time differences due to the existing time zones . These differences can be balanced out by merging them at CLS-Bank . The resulting system is simple: either both contractual partners receive the service to which they are entitled at the same time or none. If the requirements are met on both sides, the CLS-Bank distributes the payments to the other contractual partner. In this way, the CLS-Bank makes a significant contribution to eliminating the settlement risk.
The CLS-Bank is not a central counterparty , does not provide a settlement guarantee and does not operate netting , but is a clearing house that eliminates the settlement risk of the counterparty by returning the unmatched transaction.
Business process
First, the CLS members transmit the data of the transactions to be processed ; this usually happens until midnight CET on the day of settlement. Taking into account all existing transactions, the CLS Bank then calculates the net amount that each member has to pay or receive for each currency , and a corresponding payment schedule is issued for each member at 6.30 a.m. Payments to the CLS-Bank are to be made between 7:00 a.m. and 12:00 p.m. CET, whereby the hourly deadlines must be strictly observed. This time coincides at least partially with the business hours of six of the seven RTGS systems used for payments to or by the CLS bank . Payments between members and the CLS-Bank are processed via the local payment system and are made via the account that the CLS-Bank maintains for each currency with the respective central bank . Within the CLS system, between the processing of transactions and deposits and withdrawals, i.e. H. Payments in the relationship between the CLS members and the CLS Bank, separately. The principle of "payment against payment" means that the members have to show a non-negative total balance (of all currencies combined) on their CLS accounts at all times and therefore do not have any intraday overdrafts . At the end of the day, your CLS accounts will always have zero balance .
Individual evidence
- ↑ Alexandra Schaller, Continuous Linked Settlement: History and Implications , December 2007, p. 33 f. ( Page no longer available , search in web archives ) Info: The link was automatically marked as defective. Please check the link according to the instructions and then remove this notice. (PDF; 1.6 MB)
- ↑ Bank for International Settlements, Quarterly Report December 2002 , p. 64
- ↑ SPIEGEL ONLINE of December 12, 2009, Lehman transfer margin: KfW gets money back
- ↑ Bank for International Settlements, Quarterly Report December 2002, p. 65
- ↑ Bank for International Settlements, Payment Systems in the Countries of the Group of Ten , 1995, p. 551
- ↑ Bank for International Settlements, Quarterly Report December 2002, p. 69.
- ↑ CLS Market Share , February 2011 ( Memento from February 13, 2012 in the Internet Archive )
- ↑ CLS Market Share , December 2015 ( Memento of the original from February 22, 2016 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice.
- ↑ Gerald R. Riedl, Bank Operational Payment Transactions , 2002, p. 227
- ↑ Bank for International Settlements, Quarterly Report December 2002, p. 71
