ALTHOUGH CLS BANK was officially launched on September 9 2002, its conception can be traced back far further to the afternoon of June 26, 1974. On that day, the German authorities shut Bankhaus Herstatt, with ramifications that were to spook the regulators for the next quarter of a century.
Herstatt was a relatively active participant in the foreign exchange market whose closure highlighted a big weakness in the FX market’s settlement method. According to Gabriele Galati of the Bank for International Settlements (BIS), writing in the BIS Quarterly Review, December 2002, Herstatt’s closure started, "a chain reaction that disrupted payment and settlement systems. Its New York correspondent bank suspended all US dollar payments from the German bank’s account. Banks that had paid Deutschemarks to Herstatt earlier that day therefore became fully exposed to the value of those transactions."
As Galati went on to say,...
