The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site. Please see our Subscription Terms and Conditions.


All material subject to strictly enforced copyright laws. © 2021 Euromoney, a part of the Euromoney Institutional Investor PLC.
Foreign Exchange

Settlement: CLS passes the Refco test

Regulators can congratulate themselves after continuous linked settlement worked, but mutterings of serious shortcomings carry on.

Foreign exchange market participants should be relieved that the continuous linked settlement (CLS) system did exactly what it was designed to do as the US broker Refco collapsed into Chapter 11 bankruptcy in October. There are no reports of money being paid away without the opposite side of the transaction being received, which can be largely attributed to the success of CLS’s design.

Refco’s spectacular collapse will have revived memories of Baring Brothers’ demise in 1995 and, for those with really long memories, the failure of Bankhaus Herstatt in 1974. On that occasion, when German regulators closed down Herstatt, the bank had received its Deutschmark side of FX transactions in Europe before it had made any of its dollar payments in the US. The result was that counterparties were left holding unsecured claims against the insolvent bank’s assets.

Settlement risk, or Herstatt risk as it is often termed, has been a cause for concern ever since. The unregulated FX market was of particular concern, especially as it grew in size through the 1990s. Systemic risk as the result of a massive settlement failure was regarded as a major worry; the response was the creation and implementation of CLS.

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.

SUBSCRIBE ONLINE TODAY

Unlimited access to Euromoney.com and Asiamoney.com

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually

FREE 7 DAY TRIAL

Unlimited access to Euromoney.com and Asiamoney.com, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors

LOGIN NOW

Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree