Currency Program
Briefing Book
Our vision is to be the leading provider
of risk mitigation and operational
services for the global FX market.
Contents
Executive summary
3
CLS-eligible currencies
7
Central banks for CLS-eligible currencies
7
The CLS system
8
CLS operational timeline – 24 hours x 5.5 days
9
The CLS community
12
Benefits of joining CLS
14
Currency eligibility requirements
17
Central bank commitments
22
Settlement member commitments
23
www.cls-group.com
Introduction
We operate the world’s largest multicurrency cash settlement service to
mitigate FX settlement risk for our settlement members and their clients
globally. With more than 60 settlement members, comprising the world’s
largest financial institutions, and third-party clients, including banks,
funds, non-bank financial institutions and multinational corporations,
we settle payments relating to FX trades across 18 currencies.
We are one of a number of systemically important financial market
infrastructures considered critical to the functioning and stability
of the global financial market.
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Executive summary
The FX market, settlement risk and CLS
The FX market is the world’s largest financial market by value and is integral to
global trade and commerce. Its most common transactions – FX spot, FX swaps
and FX forwards – require counterparties to exchange principal (value of the trade)
in two currencies to settle an FX transaction. Settlement risk includes the risk that
one party to an FX transaction delivers the currency it sold, but does not receive
the currency it bought from its counterparty. The result is a loss of principal.
We prevent this by simultaneously settling the payments on both sides of an
FX transaction.
1. Australian dollar, Canadian dollar, Danish
krone, euro, Hong Kong dollar, Hungarian
forint, Israeli shekel, Japanese yen, Korean
won, Mexican peso, New Zealand dollar,
Norwegian krone, Singapore dollar, South
African rand, Swedish krona, Swiss franc,
UK pound and US dollar.
2. CLS also manages payment instructions
relating to certain credit derivatives, but
these are not covered in this briefing book.
Due to the potential for loss of the full value of a transaction, FX market
participants consider settlement risk the most significant risk they face.
In February 2013 the Basel Committee on Banking Supervision published its
“Supervisory guidance for managing risks associated with the settlement of foreign
exchange transactions”. This document highlights the crucial nature of banks’ and
their supervisors’ continuing efforts to reduce or manage FX settlement risk, for
example, by increasing the number of currencies, products, and counterparties
eligible for payment-versus-payment (PvP) settlement arrangements.
The CLS system
We mitigate settlement risk by simultaneously settling the payments on both
sides of an FX transaction on a real-time basis. We do this using our unique PvP
settlement service which is linked to the real time gross settlement (RTGS) systems
of the 18 currencies1 eligible for CLS settlement.
Our settlement service is supported by a robust and resilient infrastructure within a
comprehensive and well-established legal framework. We hold an account at each
of the central banks of the currencies we settle. Settlement occurs on the books
of CLS and is final and irrevocable in each of the currencies. Settlement members’
funding obligations are multilaterally netted to significantly reduce the value of
required pay-ins.
We settle payment instructions relating to a variety of FX transactions: FX spot,
FX forwards, FX option exercises, FX swaps, and cross currency swaps2.
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The CLS community
Our community includes the central banks of each of the currencies settled in CLS,
settlement members (direct participants) and their customers (indirect participants),
nostro agents, and liquidity providers (banks that commit to providing liquidity
to CLS in a CLS-eligible currency in certain circumstances). We have over 60
settlement members from 22 jurisdictions, which in turn have customers in over 80
jurisdictions.
Benefits of joining CLS
As a financial market infrastructure at the center of the FX market, we offer unique
benefits to our community. For central banks, we:
•
Enhance financial stability
•
Improve visibility of the onshore and offshore FX market from our data reports,
including data relating to currencies settled within our system
•
Improve risk management practices
•
Coordinate crisis management processes.
Our value proposition to settlement members (including central bank settlement
members):
•
Reduces funding requirements to approximately 4% (or by 96%), using
multilateral netting
•
Further reduces funding requirements to approximately 1% (or by 99%)
by using other liquidity tools
•
Increases operational efficiencies by:
• Reducing
payments by multilaterally netting cash flows for each
settlement member
• Maximizing
the benefits of straight-through processing and minimizing
the risk of operational errors and associated costs
•
4
Provides business growth opportunities through enhanced credit efficiency,
an expanded range of counterparties and increased trading opportunities.
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Briefing book
CLS value proposition
Risk mitigation and management
•
Settlement risk
•
Operational risk
Capital and liquidity efficiencies
•
Multilateral netting
•
Liquidity management
•
Efficient use of credit lines
Operational and IT efficiencies
•
Pre-settlement: Straight-through processing
•
Post-settlement: Process efficiencies and fewer failures
•
CLS architecture
Business g
rowth
•
Third-party provider opportunities
•
Expanded range of counterparties
•
Additional trading opportunities from new CLS currencies
A financial market infrastructure at the center of the FX market
•
Regulatory expertise and interface
•
Common legal framework
•
Centralized crisis and failure management
•
Convening capability
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Currency eligibility
All currencies must meet specific eligibility criteria with respect to:
•
Domestic support
•
Sovereign credit rating
•
Finality of settlement, finality of funding, enforceability of netting and
unity of account, including during a settlement member insolvency
•
Anti-money laundering framework
•
Currency convertibility and acceptable exchange controls
•
Local banking system stability
•
Sufficiently deep local liquidity
•
RTGS system messaging formats, operational capabilities,
and operational resiliency
•
CLS account at the central bank.
Settlement member eligibility
The eligibility criteria for settlement members include, among others,
standards related to financial and operational capabilities to ensure the
institutions do not pose unnecessary risk to the settlement system and
other participants in the service.
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CLS-eligible currencies
CLS was established in 2002 as a public-private sector initiative to mitigate FX
settlement risk. It has grown to include settlement of payment instructions in 18
currencies: Australian dollar, Canadian dollar, Danish krone, euro, Hong Kong
dollar, Hungarian forint, Israeli shekel, Japanese yen, Korean won, Mexican peso,
New Zealand dollar, Norwegian krone, Singapore dollar, South African rand,
Swedish krona, Swiss franc, UK pound and US dollar.
Central banks for
CLS-eligible currencies
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The CLS system
Settlement members submit payment instructions relating to their own FX transactions,
or they may submit payment instructions on behalf of third parties’ FX transactions.
When a CLS-eligible FX transaction is executed by a settlement member or their
customers, we receive electronic payment instructions for both sides of the transaction.
Our system authenticates and matches the payment instruction, which provides legal
confirmation, and stores it until the agreed settlement date.
Although settlement members can submit payment instructions at any time prior to the
settlement date, settlement members generally submit payment instructions to CLS within
30 minutes of execution of the underlying FX transaction.
On each settlement date, we simultaneously settle each pair of matched payment
instructions that satisfies three risk management tests.
Both at the start and at the end of a normal business day each settlement member’s
multicurrency account has a zero balance. The funding and pay-out of multilateral net
positions is conducted following a daily defined schedule. Settlement members pay and
receive funds through our central bank account in each currency via their own accounts
or nostro bank accounts.
The settlement of payment instructions and the associated payments are final and
irrevocable. Settlement finality is one of the most important elements of the CLS
settlement service.
The diagram on the next page illustrates our operational timeline without adjustments for
daylight savings. We operate 24 hours a day, 5.5 days per week, closing on Saturday and
re-opening on Sunday evening, CET. Overlapping RTGS system operating hours allow us
to settle all eligible currencies simultaneously and synchronously, achieving PvP.
Key operational processes include:
•
00:00 CET: Initial pay-in schedule sent to settlement members with funding
requirements reduced thanks to multilateral netting
•
We then calculate and identify potential intra-day swap transactions between
participating settlement members, which further reduces funding requirements
•
06:00 – 07:00 CET: Handshake is received from each RTGS system
•
06:30 CET: Revised pay-in schedule sent to settlement members
•
07:00 CET: Settlement pay-ins and pay-outs commence. We simultaneously settle
each pair of matched payment instructions by making the corresponding debit and
credit entries across settlement members’ accounts. Multilateral netting and other
liqudity tools result in an average net funding requirement of approximately 1%.
We make outgoing payments of long balances to settlement members
•
09:00 CET: Settlement completion target time, with around 99% of payment
instructions usually settled by 08:00 CET
•
10:00 CET / 12:00 CET: Funding completion time for Asia Pacific and European/North
American currencies, respectively.
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CLS operational timeline
– 24 hours x 5.5 days
06:30
Bilateral rescind deadline
20:00 – 20:45
Credit derivatives (DTCC)
cash flow submission
window for next
settlement day
20:00
CET
22:00
00:00
Unilateral rescind
deadline
06:30
Revised pay-in schedule
issued. Central bank
pay-in report issued
00:00
Initial pay-in schedule
issued (triggers in/out
swap process)
00:00
02:00
07:00
Start of
settlement
04:00
06:00
08:00
10:00
Asia Pacific
funding completion
target time (pay-in)
09:00
Settlement
completion
target time
12:00
European/ North
American funding
completion target
time (pay-in)
12:00
10:00
Settlement
20:00
Pay-ins / pay-outs
rocess
in / pay-out p
Completion of pay-
20:00
CET
22:00
00:00
02:00
01:15
In/out swap
details available to
settlement members
04:00
06:00
08:00
12:00
10:00
10:25
Currency close
Asia Pacific
06:00 – 07:00
RTGS system
handshakes
13:00
Currency close
European /
North American
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Robust and resilient infrastructure
In April 2012, the Committee on Payments and Market Infrastructures (CPMI)3 and
the Technical Committee of the International Organization of Securities Commissions
(IOSCO) published the Principles for Financial Market Infrastructures (PFMI),
setting out rigorous international standards for payment, clearing and settlement
systems. CLS adheres to these principles. These rigorous standards ensure that the
infrastructure supporting global financial markets is robust and able to withstand
financial shocks. The standards apply to all systemically important financial market
infrastructures.
We have published our PFMI disclosure document in line with the CPMI-IOSCO
framework. Our disclosure document describes our approach to observing
applicable principles during daily operations as a payments system in line with the
expectations and requirements of our regulators4.
Legal framework
We are supported by a comprehensive and well-established legal framework
consisting of contractual provisions, statutes and regulations. The contractual
provisions in the CLS Rules, Member Handbook and Settlement Member
Agreements define the rights and obligations of each settlement member and CLS.
Additionally, the statutes and regulations in each jurisdiction in which we settle a
currency or where a settlement member’s head or home office is located, provide
us and our settlement members with a high degree of legal assurance with
respect to finality of settlement and funding, and for unity of account (including
the enforceability of netting). This is true even in the case of a settlement member
subsequently becoming subject to insolvency proceedings.
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3. As of 1 September 2014, the Committee
on Payment and Settlement Systems (CPSS)
changed its name to the Committee on
Payments and Market Infrastructures (CPMI).
4. It can be found at: www.cls-group.com/
About/CG/Pages/CorePrinciples.aspx
Comprehensive regulatory framework
We are regulated and supervised by the Board of Governors of the Federal Reserve
System and the Federal Reserve Bank of New York (together, the Federal Reserve)
as an Edge Act corporation. We are also subject to the oversight of the Board of
Governors of the Federal Reserve System, having been designated a systemically
important financial market utility under Title VIII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act by the Financial Stability Oversight Council.
5. A copy of the CLS Oversight Protocol
is available at www.federalreserve.gov/
paymentsystems/cls_protocol.htm.
6. “Overview of the OTC Foreign Exchange
Market,” Foreign Exchange Committee
Paper November 2009 (US): https://www.
newyorkfed.org/medialibrary/microsites/fxc/
files/news/2009/overview_nov_2009.pdf
In addition, the central banks whose currencies are settled within the CLS system
have established a co-operative oversight arrangement for the CLS system (CLS
Oversight Committee) pursuant to the CLS Oversight Protocol.5 The Federal Reserve
accepts primary responsibility for, and organizes and administers oversight and
supervision under this co-operative oversight framework and serves as the Chair
of the CLS Oversight Committee.
Proven infrastructure for the FX market
At the height of the 2008 financial crisis, during the week commencing 15 September
2008, we settled an exceptionally high value of transactions at the time, a USD
equivalent of 26.5 trillion. In November 2009, the Foreign Exchange Committee,
an industry working group sponsored by the Federal Reserve Bank of New York,
observed that “CLS served its stated function of reducing systemic risk and ensuring
that despite the large notional size of FX transactions around the world, financial
institutions had the confidence to make payments into the system because they
were protected against the loss of principal6.”
During 2015, we processed an average daily volume of close to 1.1 million payment
instructions, including those from our aggregation service, with an average daily value
of USD 4.75 trillion.
Our record of USD10.7 trillion settled in gross value on a single day was in December
2014. CLS’s peak volume day was in November 2016 at 2.6 million payment
instructions.
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The CLS community
The CLS community links central banks, settlement members, their third
party customers, nostros, and liquidity providers. We regularly engage market
participants on topics related to settlement risk mitigation.
Central banks
We link to the RTGS systems of the participating central banks and hold an account
at each of these central banks through which we send and receive payments.
Settlement members (direct participants)
Settlement members, which include some of the largest financial institutions in the
world, are direct participants in the CLS system7. They can be either shareholder
or non-shareholder or affiliate settlement members. The shareholder settlement
members are required to be shareholders in CLS Group Holdings AG, our parent
company.
Third parties (indirect participants)
Third parties are customers of settlement members that wish to settle their FX
transactions through our system, but have no direct access. Third parties include
banks, non-bank financial institutions, multinational corporations and funds.
Settlement members handle all payment instructions and funding on behalf of their
customers. They are legally responsible for processing and funding obligations for
the payment instructions they submit that are settled through their accounts with us.
Nostros
A settlement member may self-clear (hold an account at the central bank) or use a
nostro agent to send and receive payments on its behalf to us in specific currencies.
Settlement member relationships with their nostros are independent from their
relationship with us.
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7. In addition to commercial banks, central
banks can become settlement members,
subject to different requirements.
Liquidity providers
Liquidity providers are banks that commit to providing liquidity to us in certain
currencies under specific circumstances (they are often, but are not required to be,
settlement members). We may call upon liquidity providers if a settlement member
fails to meet its pay-in requirements in a particular currency and after other failure
management tools have been applied.
We will also call upon a liquidity provider to enter into a today/tomorrow swap or
an outright purchase and/or sale of currency. These transactions allow us to raise
liquidity in the currency we need to pay out to the counterparties of the delayed
or failing settlement member(s), in exchange for the currency in which we have
balances in our central bank accounts.
When a currency becomes CLS-eligible, there is no need for liquidity providers
initially.
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Benefits of joining CLS
There are unique benefits for central banks and settlement members in
jurisdictions that add their currency to CLS.
Central banks
Enhanced financial stability in the local market
The financial stability in a domestic market is enhanced when participants in its FX
market – the link to the global financial markets – mitigate settlement risk. A robust
and resilient settlement system helps mitigate the effects of either external or
internal shocks to the market.
Settlement risk mitigation
Through the use of the CLS system, institutions may manage their settlement risk
in the FX markets, reflecting the guidance from the Basel Committee on Banking
Supervision.
Insight into the FX market
Central banks whose currencies are settled in CLS receive daily settlement reports
and detailed weekly reports on the gross and net values settled in their currencies.
This offers unique consolidated insight into the flows of the FX market and its
impact on local currency liquidity, particularly when a currency has sizeable offshore
trading activity.
Adoption of best practice and standards
The adoption of best practice, business continuity processes and operational
resiliency requirements promotes higher standards and better risk management for
domestic banks to better compete in the global marketplace.
CLS Oversight Committee
The CLS Oversight Committee ensures that all participating central banks have
a mechanism for mutual assistance in carrying out their individual oversight
responsibilities of CLS. The CLS Oversight Committee meets regularly and reviews
the strategic direction of CLS in the context of the global FX industry.
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Settlement members
Reduced funding requirements and cutting-edge liquidity management
FX settlement includes potentially large funding needs in cash, as participants in the
FX market execute hundreds, or even thousands, of trades daily and some participants
regularly execute large-value trades. The combined value of these trades can run to
hundreds of billions of US dollars for individual participants, significantly affecting their
intra-day profitability, cash flow, trading capital, collateral, liquidity and risk management.
Typically, for every USD1 trillion of daily value settled through us, our settlement
members are only required to fund less than the equivalent of USD10 billion in cash.
Our settlement members benefit from freeing up cash flows that can meet liquidity
needs for other business operations, such as trading, sales and business growth.
This net funding benefit accrues from two sources: multilateral netting of payments
and bilateral liquidity risk management tools.
Each day, before settlement, based on settlement members’ combined payment
obligations, we calculate the net funding required of each settlement member on a
multilateral netted basis. The CLS system settles the gross value of the payment
obligation with the funding computed on this multilateral basis. The multilateral netting
process reduces the funding and liquidity requirements needed to settle all the payment
instructions across all currencies in a given day by approximately 96%.
Additionally, settlement members also benefit from a bilateral liquidity management tool
– in/out swaps. These swaps reduce funding requirements by an additional 78%, from
96% of gross value settled to 99% of gross value settled. Combined with multilateral
netting, this results in an average funding requirement of less than 1% of the total value
of all transactions for participating settlement members.
Multilateral netting and liquidity management tools reduce costs and offer better control
over liquidity and cash flows.
We have ongoing dialogue with our settlement members on liquidity risk management
and provide detailed information to facilitate the monitoring of each participating bank’s
liquidity needs and exposure.
Operational efficiencies
Our daily settlement cycle provides a structured environment to maximize the benefits
of straight-through processing and to minimize operational errors and their associated
costs. Our service not only allows us to provide settlement members with real-time
information on the status of each payment instruction, but also to follow-up on
unmatched payment instructions and make any corrections required before settlement.
This reduces costs of exception processing.
By having consistent operating standards across all our participants and linked RTGS
systems, we can automate the matching and settlement of CLS-eligible payment
instructions, which requires less settlement member internal resources than for the
equivalent non-eligible payment instructions.
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Additionally, participation in CLS leads to further technology efficiencies by
leveraging our architecture and applications for standardized payment and
accounting procedures for both CLS and non-CLS currencies.
Finally, there are operational efficiencies: the total number of payments required
is reduced to an average of 15 per day per settlement member, irrespective of the
number of transactions and currencies settled. This reduces both a settlement
member’s costs and associated nostro charges and reconciliations.
New revenue opportunities
Settlement members have new revenue opportunities through increased trading
capacity and providing third-party services.
Increased trading capacity
The risk mitigation we provide allows our settlement members to treat CLS-settled
transactions differently to non-CLS settled transactions. Without us, the full value of
a trade likely counts against the pre-settlement credit risk limit assigned to a given
counterparty. When that limit is reached, trading with the counterparty ceases for
the day.
CLS-settled transactions are treated differently by settlement members: some do
not attribute their CLS-settled transactions against their pre-settlement credit risk
limit at all, while others attribute only a percentage of the value of the CLS-settled
transaction against these limits. This gives settlement members the ability to
increase trading while remaining within the same established risk appetite.
Providing third-party services
Currently, more than 30% of our settlement members provide their customers
with access to CLS. By providing our service to customers, settlement members
may generate revenues and further strengthen their customer relationships. Banks
account for the majority of third-party transactions settled in CLS. Other significant
users of third-party services include funds, large corporations and other non-bank
financial institutions that have significant FX business.
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Currency eligibility requirements
The criteria for a currency to become CLS-eligible can be found in the CLS Rules8
and Member Handbook. To meet these requirements, which are described below,
the strong endorsement, support and participation of the jurisdiction’s central bank
and other relevant government agencies is necessary. Written approval from the
Federal Reserve is also required.
The key currency eligibility criteria are summarized as follows:
Requirement
Main aspects
Domestic support
•
trong commitment from central bank and other
S
authorities to support settling the currency in CLS
Sovereign credit
rating
•
inimum long-term local and foreign currency
M
sovereign credit rating of BB- (S&P or Fitch) or
Ba3 (Moody’s), or higher
Legal and
compliance
•
Domestic legislation supports:
• F
inality of the settlement of payment instructions
across CLS’s books
•
•
•
Currency
Operational and
technical
Unity of account
Acceptable rule of law
Acceptable Anti-Money Laundering (AML) regime
•
Sufficient convertibility
•
Any exchange controls should not inhibit the safe
operation of CLS
•
RTGS system operating hours in line with CLS’s
operational and settlement cycle
•
•
9. Available at www.cls-group.com/MC/
Documents/CLS_Explanation_Phases.pdf.
Finality of funding to and from CLS’s account with
the central bank
•
•
8. The addition of a new currency eligible
for settlement in the CLS System requires
the fulfilment of specified eligibility criteria
contained in Rule 3. A copy of the CLS Bank
Rules is available at: www.cls-group.com/
Membership/Pages/Criteria.aspx.
RTGS system capacity to meet CLS standards,
including ability to securely process payments on a real
time basis with no manual intervention required, as well
as allowance for contingencies in line with regulatory
requirements
RTGS system messages are SWIFT compliant
CLS opens an account at the central bank
The process of including a currency in the CLS system is described in detail in the
“Explanation of phases for onboarding a prospective currency – a practical guide
for central banks9 ”.
The legal requirements for currency eligibility contained in the CLS Rules are
described in greater detail in the CLS “Evaluation Guide” which can be requested
by contacting [email protected].
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Domestic support
The process of onboarding a currency to CLS requires commitment and support
from the relevant central bank.
In addition, the central bank’s support of banks within its jurisdiction performing
the roles of settlement members and nostro agents is fundamental.
We expect, but do not require, that commercial banks with their head or home
office in each new jurisdiction with an eligible currency will join CLS as settlement
members. In addition to becoming a settlement member, the role of nostro agent
is also important to achieve the full benefits of CLS’s risk mitigation. There is
no requirement for nostro agents to be settlement members, though often a
settlement member will have multiple roles within our community.
Adequate liquidity to facilitate settlement for banks, including nostros, may require
that operational and institutional practices have to align with CLS’s operational
timeline (allowing operational accessibility typically between 06:00 and 13:00
CET). The market and the payment system may have to accommodate changes in
currently established trading, settlement, and liquidity patterns.
Sovereign credit rating
To ensure the resilience of the CLS system, we require that a jurisdiction’s longterm sovereign credit rating must be, at minimum, a Standard and Poor’s or Fitch’s
BB- or a Moody’s Ba3.
Considering the interconnected nature of the global FX market and the central role
we play, the stability of the local banking system is integral to the overall analysis of
including a new currency into the CLS system.
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Legal matters and anti-money laundering (AML)
requirements
Legal matters
The addition of a new currency in CLS also requires the fulfilment of specified legal
eligibility criteria, including requirements that:
(i) We have determined that there is legislation or regulation (or equivalent) in the
jurisdiction of the currency that provides for the finality of (i) the settlement of
payment instructions across our books and (ii) pay-ins and other settlement-related
payments received by us through the relevant payment system for such currency;
and
(ii) We have received a legal opinion that is in form and substance satisfactory and
addresses finality of settlements and of payments made to and from our account
with the relevant central bank and such other legal considerations we may require.
Principle 1 of the PFMI requires a financial market infrastructure to have a wellfounded, clear, transparent, and enforceable legal basis for each material aspect of
its business.
AML considerations
We are required to comply with the Bank Secrecy Act and the USA Patriot Act,
including a customer identification program. We are also subject to the regulations
of the Office of Foreign Assets Control (OFAC).
To comply with these requirements, we implement AML and OFAC related
compliance programs. These programs require completion of specific due
diligence requirements and ongoing monitoring of processed activity.
Prior to permitting a currency to become CLS-eligible, we undertake a due
diligence review of the AML and counter-terrorist financing regime (AML/
CTF Framework) in place in the relevant jurisdiction to assess whether key
requirements of the Financial Action Task Force’s 40 + 9 recommendations have
been implemented. The review also establishes whether any significant gaps exist
or special measures have been imposed on the jurisdiction that could expose us
to risks. The review includes onsite visits with the central bank and government
agencies, such as the Finance Intelligence Unit.
For any prospective settlement member to participate in CLS, we carry out a due
diligence review of their AML/CTF Framework. The due diligence review includes
onsite visits with the prospective settlement member.
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Acceptable currency restrictions
A currency is not required to be fully convertible to be CLS-eligible, and we
currently support currencies that are not fully convertible. However, in jurisdictions
where FX exchange controls exist, it must be clear to us as a matter of law and/
or regulation that fundamental processes relating to CLS payments are possible
without unduly burdening us with reporting requirements and without subjecting us
to potential legal liability.
We do not require or seek to encourage further internationalization of a currency
as a prerequisite of currency eligibility beyond that which is desired by the local
authorities. We recognize there may be restrictions on the payments involving
the local currency, whether or not local institutions are involved, as well as on
payments involving local institutions but not involving the local currency. Accepting
that these restrictions may be in place, it is important that we reach a common
understanding with the central bank regarding what underlying transactions
involving its currency or local institutions would be eligible for CLS settlement.
Additionally, settlement members must take responsibility for their underlying
transactions complying with local law and regulations. We do not accept any
responsibility or civil or criminal liability for any non-compliance by a settlement
member or its third party customers and will not undertake any monitoring
obligations with respect of compliance with those laws and regulations.
Operational requirements
Our core settlement service is delivered using highly secure, resilient and available
network connections and strong encryption. The following summary outlines the
key technical and operational requirements for central banks to participate in CLS.
Detailed requirements are discussed with the relevant central bank during the
onboarding of a currency.
Architecture
We require an RTGS system that can make timely transfers of central bank funds
to and from our account at the central bank.
We ask all new jurisdictions to have their RTGS systems connect to us through the
SWIFT Network using FIN messages. If an RTGS system uses FIN messages over
the SWIFT network for their domestic transfers, we can connect in the same way
as a domestic commercial bank. Other RTGS systems use a proprietary (nonSWIFT FIN based) message protocol. In this case, we will ask the central bank
to acquire an application for converting to SWIFT FIN messages.
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Some central banks require commercial banks to have a local terminal connected
to the RTGS system. We do not expect to run local terminals to access RTGS
systems in new jurisdictions.
We expect each RTGS system to send SWIFT FIN messages for each movement
in our account in real-time. In addition, we also expect the RTGS system to send
account statements to us on demand (for intraday reconciliation) and at the end of
the RTGS system’s business day.
Core hours of operation
We operate a daily cycle during a five-hour window when the eligible currency
RTGS systems are open and able to send and receive payments.
On each settlement day, we expect the RTGS system to be open by 07:00 CET,
and to notify us of readiness to begin settlement before 07:00 CET.
The RTGS system should be ready to send and receive payments by 07:00 CET
and, under normal circumstances, remain open until at least 10:30 CET for early
closing currencies in Asia Pacific and 12:00 CET for the late closing currencies in
Europe, Africa and the Americas.
Resilience
Since failure to make payments in one currency will affect pay-outs and settlement
in other currencies, we suggest all components of the architecture of an RTGS
system have redundancy capacity, including duplication across separate sites,
thus avoiding exposure to single component failures.
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21
Central bank commitments
Strong commitment and support from the central bank and other regulatory
authorities is an important factor for the successful inclusion of the currency.
Legislative changes
To address the legal requirements of finality and netting necessary for a currency
to become CLS-eligible, legislative or regulatory changes are usually required.
We work closely with our local legal counsel, the central bank and other regulators,
as appropriate, to determine what changes in law and regulation are required to
ensure those requirements are met and we are satisfied as to our obligations with
respect to the PFMI.
RTGS system
During the process of including a currency, together with the central bank we
conduct a thorough analysis of the RTGS system, including operational and IT
requirements, and identify any necessary changes. Once these are completed,
we perform rigorous testing and trialing of payments through the RTGS system.
Domestic support
We expect the central bank to encourage large local banks in their market to play
a role as settlement members and/or nostros. Although we do not require new
settlement members from the jurisdiction of a prospective currency, we strongly
encourage local participation to maximize the benefits for the jurisdiction’s FX
market. Particularly, the availability of nostro services in the new currency is crucial
to ensure sufficient liquidity for CLS-related payments. We engage directly with the
local banking community with the support of the central bank; this is integral to the
success of this effort.
To better understand the commitments, decisions and resources most likely
required from the central bank, the self-assessment questionnaire for central
banks on CLS’s currency eligibility criteria offers additional guidance10. To receive
additional information, please email [email protected].
22 Currency Program
Briefing book
10. Available at www.cls-group.com/MC/
Pages/Publications.aspx
Settlement member commitments
Joining CLS as a settlement member
The process for joining CLS as a settlement member need not be simultaneous
with the onboarding of the currency. There have been cases of a settlement
member from a particular jurisdiction joining CLS before its currency is designated
CLS-eligible and of a jurisdiction whose currency is designated eligible even in the
absence of a settlement member from that jurisdiction.
11. The CLS settlement membership
fact sheet is available at www.cls-group.
com/MC/Documents/CLS-SettlementMembership.pdf
For an overview of settlement membership please download our fact sheet11
or email [email protected].
Shareholder and settlement membership
We require the prospective shareholder settlement member to become a
shareholder of CLS Group Holdings AG. Non-shareholder and affiliate settlement
members have different commercial constructs in lieu of shareholding and no
shareholder rights.
IT commitments
We require settlement members to submit payment instructions via SWIFT.
SWIFTNet FIN charges for messaging are invoiced directly by SWIFT. These
costs should be calculated based on the expected volume of messages and the
settlement member’s SWIFT messaging tier.
Price per transaction
Our current pricing policy is based on a tariff determined by two components:
settlement values and volume of payment instructions submitted to CLS.
Value-based charges
Each month we calculate the absolute unit price for each USD million of value
settled for all settlement members, based on the total CLS average daily capped
value settled. The cap is applied at a trade level, with any trade over USD100
million counted as USD100 million. This unit price is then charged to all settlement
members based on their total capped value settled in that month.
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23
Volume-based charges
For each settlement member, we tier charges based on incremental bands of
instruction volumes submitted by that settlement member in the month.
The same charging structure applies to all settlement members. The overall blended
charge for all instructions will vary for each settlement member, depending on their
overall number of instructions submitted to CLS each month.
Monthly charges and prices vary by the overall use of the service and the individual
members’ aggregate transaction value and volume. Pricing information can be
found at www.cls-group.com.
Other charges
Settlement members pay an account opening fee on joining and thereafter annual
account maintenance and liquidity usage fees. In addition, settlement members
may incur charges for late payment and fees for participation in CLS’s in/out swap
program.
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Briefing book
Contact information at CLS
To find out more contact [email protected]
For additional information on CLS, refer to www.cls-group.com
www.cls-group.com
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