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Accounting Best Practices, Fifth Edition by Steven M. Bragg Englewood, Colorado

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11–23. Settle Foreign Exchange Transactions with the Continuous Link Settlement System

Foreign exchange settlement has been a prolonged affair in which there is significant risk of one party’s defaulting before a transaction has been completed. To avoid this risk while also speeding up the settlement process, a number of major banks banded together to create the Continuous Link Settlement (CLS) system, which is operated by CLS Bank (of which the founding banks are shareholders). In essence, member banks submit foreign exchange transactions to CLS Bank, which matches up both sides of each transaction during a five-hour period (which represents the overlapping business hours of the participating settlement systems). If the exact settlement criteria are not met for each side of the trade during this time period, then no funds are exchanged.

How does CLS impact the corporation? It gives the cash manager exact information about the availability of funds in various currencies, which had previously been difficult to predict with precision. With foreign exchange information, they can now optimize their short-term investment strategies.

Some of the better-known members of CLS Bank are Bank of America, CitiBank, Goldman Sachs, JPMorgan Chase, Mellon Bank, Morgan Stanley, and State Street Bank and Trust. Other banks can submit their foreign exchange transactions through these member banks, so access to the CLS system is quite broad.

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