The Bank For International Settlement

843 WordsJun 6, 20164 Pages
In an ever changing foreign exchange market countries and corporations were searching for a system that could help reduce the risk involved while handling foreign exchange situations. With the demise of the Bankhaus Herstatt in 1974 a system that could protect against the risk of FX settlements was in dire need. The Bank for International Settlement developed the Continuous Linked Settlement (CLS) in 2002. The group would provide the members associated with them the allowance to use the foreign exchange market as a national payment system. According the textbook, International Finance by Maurice Levi, the definition of the Continuous Linked Settlement is “A procedure for banks to settle accounts between themselves that credits and debit accounts simultaneously. It Is designed to reduce the risk in the financial system.” (Levi, p. 546) JPMorgan Chase and Co defines the process of the Continuous Linked Settlement as a “process which provides for “payment vs payment” in the settlement of foreign exchange transactions.” ( JP Morgan Treasury Services p. 1) From these two definitions, it can be concluded that the CLS was indeed developed to help reduce the risk as payments from both parties would be made simultaneously to ensure that the residing parties would receive their payment. Before this system was in place it was very difficult to ensure that if one party made their required payment that the other side would one even make the payment or to use the correct foreign exchange
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