The CLS Bank: A Solution to the Risks of International Payments Settlement?
Charles M. Kahn
University of Illinois, Urbana-Champaign; Feseral Reserve Bank of Saint Louis; Bank of Canada
Federal Reserve Bank of Atlanta
Carnegie-Rochester Conf. Series on Public Policy
Foreign exchange transactions are subject to a unique type of settlement risk. This risk ultimately stems from the difficulty of coordinating separate settlements in two different currencies. Settlement of foreign exchange transactions through the proposed CLS ("Continuous Linked Settlement") Bank has been discussed as a potential solution to this problem. This paper describes the CLS proposal and analyzes the incentives it places on banks engaged in foreign exchange transactions. The analysis shows that while settlement through the CLS Bank may represent an improvement over current arrangements, some important problems associated with foreign exchange settlements will remain.
Keywords: Foreign exchange, settlement risk
JEL Classification: G20, F31
Date posted: February 1, 2001