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How Does CLS Work?

April 26, 2017CLS

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How Does CLS Work?

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CLS provides a continuous mechanism for the simultaneous settlement of both sides of an FX deal. The mechanism involves an ongoing process of submitting trade instructions, matching those trades, funding the deals, and then paying out to the participating accounts. CLS operates as a Payment versus Payment (PvP) system, which differs from the more traditional Delivery versus Payment (DvP) process. The two sides to a foreign exchange transaction are settled separately in a DvP transaction. Time zone differences increase the risk of one party defaulting before both sides of the trade are settled. PvP eliminates time zone risk because CLS settles both sides of a transaction simultaneously. Settlement in CLS is final and irrevocable. Investment managers can participate easily in CLS if the account custodian and the bank trading partner are eligible to settle via CLS and if their currency deal involves the settlement of these 17 currencies ³: Australian dollar Israeli shekel Norwegian krone