Almost exactly five years after it was first announced, and
after numerous delays, continuous linked settlement (CLS) is on the
verge of becoming a reality. And with the backing of central banks
in the G7 countries, plus 70 shareholder banks, everyone involved
in the foreign exchange markets should sit up and take notice.
Forex is the largest market in the world, with an estimated daily
volume of about $2 trillion. Trades usually settle in T+2 or T+3,
which means that at any one time the settlement risk on banks'
books worldwide amounts to at least $4 trillion, millions of which
go astray each day.
Ever since the collapse of German bank Herstatt in 1974, banks
have been aware of this risk. But taking less risk would tend to
reduce an institution's earning potential, which is why banks
preferred to live with Herstatt risk for 23 years before agreeing
together...
