www.cls-group.

com

Currency Program
Briefing Book

www.cls-group.com 2

Front cover clock:

Cosmo Clock, Yokohama, Japan, 1989
Part clock, part giant ferris wheel.
The worlds largest clock.

Introduction
CLS Group (CLS) operates the worlds largest
system for mitigating settlement risk in
foreign exchange (FX) transactions. CLS
mission is to enhance financial stability by
providing risk mitigation services to the
global FX market.
In support of its mission, CLS has created
this Briefing Book to present the benefits of
joining CLS multicurrency settlement service.

Contents
Executive summary.................................................................... 1
The CLS System........................................................................ 4
Central Banks for CLS Eligible Currencies.................................. 4
How CLS Works........................................................................ 5
CLS Operational Timeline........................................................... 6
The CLS Community.................................................................. 8
Benefits of Joining CLS.............................................................. 9
Eligibility Requirements to Add a Currency............................... 11
The Settlement Membership Process....................................... 14
Central Bank Commitments..................................................... 14
Settlement Member Commitments........................................... 15
Contact Information at CLS...................................................... 15
Appendix 1:
Description of Legal Requirements for Currency Eligibility......... 16

Executive Summary
The FX market, Settlement Risk and CLS

The FX market is the worlds largest financial

market by value and is integral to global
commerce. The most common transactions
spot, swaps and forwards require the
exchange of principal in two currencies. As
a result, each party to these transactions is
exposed to settlement or principal risk
the risk that one party delivers the currency
it sold but does not receive the currency it
bought from its counterparty.

The CLS System

CLS is supported by a robust and resilient infrastructure within
a comprehensive and well-established legal framework. CLS
holds an account at each of the central banks of the 17
currencies it settles. Settlement across the books of CLS and
funding in each of the 17 currencies is final and irrevocable.
CLS funding obligations (Pay-ins), are multilaterally netted to
significantly reduce the value of required Pay-ins.
CLS is distinguishable from clearing houses that function as
central counterparties (CCPs) because it does not become
party to any underlying trades, assume counterparty risk
or guarantee the settlement of transactions.
CLS settles payment instructions relating to a variety of
FX transactions: FX spot, FX forwards, FX option exercises,
and FX swaps.1

Due to the potential for loss of the full value of a transaction,

settlement risk is widely considered the most significant risk for
FX market participants. Furthermore, failed settlements can have
systemic impacts. CLS fulfills a fundamental role in the FX market
by providing stability through risk mitigation, particularly during
periods of crisis.
CLS provides FX settlement risk mitigation through its unique
payment versus payment (PvP) service, which links to the real
time gross settlement (RTGS) systems of each currency CLS
settles.
In February 2013 the Basel Committee on Banking Supervision
published, Supervisory guidance for managing risks associated
with the settlement of foreign exchange transactions. This
paper highlighted the crucial nature of banks and their
supervisors continuing efforts to reduce or manage risks
associated with the settlement of FX transactions; for example,
by increasing the number of currencies, the scope of products
and the types of counterparties that are eligible for settlement
through PvP arrangements.

 LS also handles payment instructions that relate to options

C
and credit derivatives, but these are not covered in this Briefing Book.

www.cls-group.com 1

Involved Parties
The CLS community includes the central banks of each
participating currency (including five from the euro zone),
Settlement Members (direct participants in CLS) and their third
party customers (indirect participants in CLS), nostro agents
and Liquidity Providers (banks that commit to providing liquidity
to CLS in a CLS Eligible Currency in certain circumstances).
CLS has over 60 Settlement Members from 24 jurisdictions,
which in turn have customers in over 80 jurisdictions.
Value Proposition
CLS offers unique benefits to its community. For central banks
these benefits include:
Support for enhanced financial stability
Improved visibility of the onshore and offshore FX market
from CLS reports, including data relating to currencies settled
within the CLS System
Support for improved risk management practices
Coordinated crisis management processes
CLS value proposition to Settlement Members (including
Central Bank Settlement Members) provides:
Risk mitigation and management
Capital and liquidity efficiencies
Operational and IT efficiencies
Business growth opportunities
The benefits created by CLS being a financial market
infrastructure at the center of the FX market

2 Currency Program Briefing Book

Risk Mitigation and Management

CLS settlement service mitigates settlement risk, and offers
pre-settlement credit risk and operational risk benefits.
Capital and Liquidity Efficiencies
CLS multilateral netting provides significant liquidity benefits,
reducing funding requirements.
Operational and IT Efficiencies
CLS straight through processing has assisted Settlement
Members by supporting enhanced pre- and post-settlement
operations and architecture.
Business Growth Opportunities
Settlement Members can increase credit efficiency, expand
the range of counterparties and trading opportunities in new
currencies. In addition non-central bank Settlement Members
can offer CLS third party services to their customers.
Financial Market Infrastructure at the Center of the FX Market
CLS robust legal framework and regulatory expertise allow it to
be a convening authority that can provide FX market solutions and
provide centralized crisis and failure management for the FX market.

Eligibility
Currency Eligibility
CLS eligibility criteria are designed to ensure that a prospective
currency meets the standards shared by the existing CLS
Eligible Currencies with respect to:

Participant Eligibility
The eligibility criteria for Settlement Members and Liquidity
Providers include standards related to financial and operational
capabilities and liquidity sufficiency, to ensure that commitments
to CLS will be met.

Central bank support

Sovereign credit rating
Finality of settlement, finality of funding, enforceability of
netting and unity of account, including during a Settlement
Member bankruptcy
Anti-money laundering
Currency convertibility and exchange controls
Local banking system stability
S
 ufficient pool of Liquidity Providers for most investment
grade currencies
RTGS system messaging and timed payments
CLS account at the central bank

Member Value Proposition

Capit
al &

Liq
uid
ity
E

Operational &
IT

A Financi

f
ter o
Infrastructure at the Cen

ar k

Eff
i
c
i
e
nci
es

al M

r
et
Ma
FX
the

A Financial Market Infrastructure

at the Center of the FX Market
Regulatory Expertise and Interface
Common Legal Framework
Centralized Crisis and Failure Management
Convening Authority

n
atio
itig
M
isk

Capital & Liquidity Efficiencies

Multilateral Netting
Liquidity Management Challenges

s
cie
ien
ffic

Risk Mitigation & Management

Settlement Risk
Pre-Settlement Credit Risk
Operational Risk

Operational & IT Efficiencies

Pre-Settlement
Post-Settlement
CLS Architecture

ke
t
B u si n e s s G r o w t h

Business Growth
Third-Party Provider
Expanded Range of Counterparties
Additional Trading Opportunities from new CLS Currencies

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The CLS System

Background

CLS was established in 2002 as a private sector initiative

to mitigate FX settlement risk. It has grown to include
settlement of payment instructions in 17 currencies:
Australian dollar, Canadian dollar, Danish krone, euro,
Hong Kong dollar, Israeli shekel, Japanese yen, Korean
won, Mexican peso, New Zealand dollar, Norwegian krone,
Singapore dollar, South African rand, Swedish krona, Swiss
franc, British pound sterling and United States dollar.

Central Banks for CLS Eligible Currencies

Reserve Bank of Australia
Bank of Canada
Danmarks Nationalbank
European Central Bank
Hong Kong Monetary Authority
Bank of Israel
Bank of Japan
Bank of Korea
Banco de Mexico
Reserve Bank of New Zealand
Norges Bank
Monetary Authority of Singapore
South African Reserve Bank
Sveriges Riksbank
Swiss National Bank
Bank of England
US Federal Reserve

4 Currency Program Briefing Book

How CLS Works

Settlement Cycle

Settlement Members submit payment

instructions relating to their own FX
transactions, or they may submit payment
instructions on behalf of third parties.
Once received, payment instructions are
authenticated and matched by CLS and
stored until the settlement date. Although
Settlement Members can submit 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 the settlement date, the settlement of payment instructions
in CLS occurs during a two-hour window. Funding, which is a
separate but closely related process from settlement, occurs
during a five-hour window.2
Settlement takes place across the books of CLS. Each
Settlement Member holds a single multi-currency account
with CLS, and at the start and end of a normal day each
account has a zero balance. After verifying that the
2

F or Asia Pacific currencies, the funding window is three hours

(7:00 CET 10:00 CET as detailed in the chart on page 6)

settlement of matched payment instructions satisfies several

risk management tests, CLS simultaneously settles those
instructions on a gross basis by making the corresponding debit
and credit entries across the relevant Settlement Members
accounts.
The diagram on the next page illustrates the CLS operational
timeline (without adjustments for daylight savings). CLS
operates 24 hours a day, 5.5 days per week, closing on Friday
evening and re-opening on Sunday evening, CET.
Key operational processes include:
00:00 CET: Initial schedule of timed payments (Pay-Ins) sent
to Settlement Members
00:00 CET: CLS calculates and identifies potential
intra-day swap transactions between participating
Settlement Members, which reduce funding requirements
by approximately 76%
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: Pay-ins commence. CLS simultaneously settles
each pair of matched payment instructions by making the
corresponding debit and credit entries across Settlement
Members accounts at CLS. Multilateral netting results in an
average net funding requirement of approximately 4%.
 LS makes outgoing payments of long balances to Settlement
C
Members.

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CLS Operational Timeline 24 x 5.5

CET
20:00

22:00

20:0020:45
Credit derivatives
(DTCC) cash flows
submission window
for next settlement
day

00:00

02:00

04:00

06:00

00:00
Unilateral rescind
deadline

06:30
Bilateral rescind deadline

00:00
Initial pay-in schedule
issueed (triggers I/O
swap process)

06:30
Revised pay-in schedule
issued. Central bank pay-in
report issued

08:00

07:00
Start of settlement

Settle

Normal processing settlement

Instruction input and matching

01:15
I/O swap details
available to Members

20:00
CET

22:00

00:00

Daily funding requirements are determined

on a multilateral netted basis resulting in
an average net funding requirement of
approximately 4%. For every USD 1 trillion
of value settled, Settlement Members are
required to fund less than the equivalent of
USD 40 billion in cash.3
Robust and Resilient Infrastructure
In April 2012, the Committee on Payment and Settlement
Systems (CPSS) and the Technical Committee of
the International Organization of Securities
Commissions (IOSCO) published the Principles for
financial market infrastructures (PFMI), setting out
more demanding international standards for
payment, clearing and settlement systems.
The new standards are designed to ensure that the
infrastructure supporting global financial markets is robust
and able to withstand financial shocks. They apply to all
systemically important financial market infrastructures and
replace the 2001 Core Principles for Systemically
Important Payment Systems.

02:00

06:00 07:00
RTGS system handshakes

04:00

To facilitate implementation and promote ongoing

observance of the PFMI, CPSS-IOSCO also issued the
PFMI: disclosure framework and assessment
methodology. In line with their recommendation,
CLS has published a PFMI Disclosure Framework4.
The framework describes our approach to observing
applicable principles during daily operations as a
payments system in alignment with the expectations
and requirements of our regulators.
Legal Framework
The CLS system is 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. Also,
statutes and regulations in each jurisdiction in which CLS
settles a currency or a Settlement Members head or home
office is located provide CLS and its 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. The CLS legal framework and,
specifically, the legal requirements for currency eligibility, are
described in greater detail in Appendix 1 Description of Legal
Requirements for Currency Eligibility.

After aggregate effects of In/Out Swaps discussed below, netting efficiencies inside CLS increase up to 99%.

These can be found at: http://www.cls-group.com/About/CG/Documents/PFMI%20Disclosure%20Framework%202014.pdf

6 Currency Program Briefing Book

06:00

08:00

10:00

09:00
Settlement completion
target time

12:00

10:00
Asia Pacific funding
completion target
time (pay-in)

14:00

16:00

18:00

20:00

16:00

18:00

20:00

12:00
European / North
American funding
completion target time
(pay-in)

Pay-ins / pay-outs

Completion of pay-in / pay-out process

10:25
Currency close Asia
Pacific

10:00

12:00

13:00
Currency close
European / North
America

14:00

Comprehensive Regulatory Framework

As an Edge Act corporation, CLS is 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). CLS is 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.
Furthermore, the central banks whose 17 currencies are settled
within the CLS system have established a cooperative 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, the oversight and supervision of CLS under this
cooperative oversight framework and is the Chair of the CLS
Oversight Committee.

Achievements
Proven Infrastructure for the FX Market
During the second quarter of 2013, CLS received on average
a daily volume of close to 1,356,000 payment instructions,
including those from its aggregation service, with an average
daily value of USD 5.15 trillion.
At the height of the 2008 financial crisis, during the week
commencing September 15, 2008, CLS 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 principal.6

A copy of the CLS Oversight Protocol is available at http://www.federalreserve.gov/paymentsystems/cls_protocol.htm.

 Overview of the OTC Foreign Exchange Market, Foreign Exchange Committee Paper November 2009 (US):
http://www.newyorkfed.org/fxc/news/2009/overview_nov_2009.pdf

www.cls-group.com 7

The CLS Community

The CLS community is comprised of central
banks, Settlement Members, their third party
customers, Nostros and Liquidity Providers.
CLS regularly engages market participants on
topics related to settlement risk mitigation.

Nostros
A Settlement Member may use a Nostro Agent to send and
receive payments on its behalf to CLS in specific currencies.
A Settlement Members relationships with its Nostros are
independent from its relationship with CLS.
Liquidity Providers

Central Banks
CLS links directly to the RTGS systems of the participating
central banks. CLS holds an account at each of these central
banks, through which payments are sent and received.
Settlement Members (Direct Participants)
Settlement Members are direct participants in the CLS system7
and are required to be shareholders in CLS Group Holdings AG,
the ultimate parent company of CLS.
Third Parties (Indirect Participants)
Third parties are customers of Settlement Members that wish to
settle their FX transactions through CLS, but have no direct access
to, or relationship with CLS. Third parties include banks, non-bank
financial institutions, multinational corporations and funds.

Liquidity Providers are banks that commit to providing liquidity

to CLS in a currency in certain circumstances (they are often,
but are not required to be, Settlement Members). Liquidity
Providers may be called upon by CLS if a Settlement Member
fails to meet its Pay-in requirements in a particular currency and
after other failure management tools have been applied.
CLS will call upon a Liquidity Provider to enter into a today/
tomorrow swap or an outright purchase and/or sale of
currency. These transactions allow CLS to raise liquidity in the
currency it needs to pay out to the counterparties of the
delayed or failing Settlement Member(s), in exchange for
currency in which it has balances on in its central bank
accounts.
For an initial assessment of the Liquidity Provider role please
request CLS Liquidity Provider Evaluation Guide from your
CLS contact or email: currencyprogram@cls-group.com

Settlement Members handle all payment instructions and funding

on behalf of their third party customers. Settlement Members
are responsible as principal, and not as agent or trustee, for
processing and all funding obligations arising from payment
instructions that are submitted by them to CLS and settled through
their accounts with CLS.

In addition to commercial banks, central banks can become Settlement Members, subject to different requirements.

8 Currency Program Briefing Book

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 of a domestic market is enhanced when
its FX market mitigates 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 address
regulatory guidance, including the management of their
exposure to settlement risk in the FX markets.
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.
Adoption of Best Practices and Standards
The adoption of best practices, business continuity processes
and resiliency promotes higher standards and better risk
management for domestic banks to better compete in the
global marketplace.
CLS Oversight Committee
The central banks of the currencies settled in CLS have
established a cooperative oversight arrangement to monitor
and oversee the service. The CLS Oversight Committee,
chaired by the Federal Reserve, ensures that all participating
jurisdictions have a mechanism for mutual assistance in carrying
out their individual responsibilities vis--vis CLS. The CLS
Oversight Committee meets regularly and reviews the strategic
direction of CLS in the context of the global FX industry.

Settlement Members
Liquidity Efficiencies
Each day prior to settlement, CLS calculates the funding required
of each Settlement Member on a multilateral netted basis, after
taking into consideration all payment instructions that are due
to settle that day. Multilateral netting results in the total gross
settlement value reducing by an average of 96%. Based on CLS
analysis of its data, multilateral netting offers nearly double the
liquidity efficiencies of bilateral netting.
Settlement Members can also elect to participate in a liquidity
management tool, the In/Out Swap service, to further reduce
payment obligations to CLS and mitigate their liquidity pressures.
An In/Out Swap consists of two equal and opposite FX same-day
transactions. One is settled inside CLS in order to reduce each
Settlement Members net position in the two relevant currencies.
The other is settled outside CLS. The combined effect of these
two transactions is a reduction in the funding requirements of the
two Settlement Members in CLS, while leaving the institutions
overall FX positions unchanged. On average, In/Out Swaps
further reduce the multilaterally netted payment obligations in
CLS to a funding requirement in CLS of less than 1% of the gross
settlement value.
Through risk forums and bilateral meetings, CLS has an ongoing
dialogue with its Settlement Members on liquidity risk management,
and provides detailed information to facilitate the monitoring of each
participating banks liquidity needs and exposure.
Operational Efficiencies
The CLS service and daily settlement cycle provide a structured
environment to maximize the benefits of straight through
processing and to minimize operational errors and their
associated costs. Real-time information on the status of each
payment instruction is provided to Settlement Members.
CLS is a catalyst for back-office efficiencies: unmatched payment
instructions can be followed up promptly and corrections made as
necessary before settlement. The adherence to the CLS operating
standards allows for automated matching and settlement of CLS
eligible payment instructions, which requires less Settlement
Member internal resources than non-eligible payment instructions.
In addition, participation in CLS leads to further technology
efficiencies. Current Settlement Members recognize a network
effect of leveraging CLS architecture and application for
standardized payment and accounting procedures for both CLS
and non-CLS currencies.

www.cls-group.com 9

The cash funding required of Settlement Members to complete

the daily settlement cycle is substantially less than otherwise
would be required to settle all the payments each day. Moreover,
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 Members costs and associated Nostro Account
charges and reconciliations.
New Revenue Opportunities for Settlement Members
Settlement Members are afforded new revenue opportunities
through increased trading capacity, and the provision of third
party and Nostro services.
Increased Trading Capacity
The risk mitigation provided by CLS allows Settlement Members
to treat CLS settled transactions differently than non-CLS settled
transactions. Without CLS, the full value of a trade counts against
the pre-settlement credit risk limit assigned to a given counterparty.
When the 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 provides Settlement Members
with the ability to increase trading while remaining within the same
established risk appetite.
Third Party Service Provider
Currently, 26 Settlement Members provide their third party
customers with access to CLS. These third party services
are typically an extension of services already offered by these
Settlement Members to their clients. By providing the multicurrency settlement service to customers, Settlement Members
may generate fee revenues and further strengthen their customer
relationships. While banks account for the majority of transactions
settled in CLS, third parties include funds, large corporations with
active treasuries and other non-bank financial institutions, such as
brokers that have significant FX business.

10 Currency Program Briefing Book

Eligibility Requirements
to Add a Currency
The criteria for a currency to become CLS eligible is set
forth in the CLS Rules8 and Member Handbook. In order
to meet these requirements, which are described below,
the strong endorsement, support and participation of the
jurisdictions 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

Description

Sovereign Credit Rating

Sovereign long-term credit rating (minimum of BB-/Ba3)

Legal

Legal framework (finality of settlements and payments, net funding and unity of account)
Rule of law
Anti-Money Laundering (AML) regime

Currency

Currency convertibility and exchange controls

Domestic Support

Commitment from central bank and other authorities

Liquidity Providers (minimum of three are required for currencies in most investment
grade jurisdictions)

Operational Standards

RTGS system capacity to make timed Pay-ins

RTGS system operating hours in line with CLS cycle
RTGS system connection through SWIFT Network
CLS account at the central bank

For a detailed description of the processes by which a currency

is included in the CLS system please request Explanation of
phases for on-boarding a prospective currency from your CLS
contact or email currencyprogram@cls-group.com.

The legal requirements for currency eligibility contained in the

CLS Rules are also described in greater detail in Appendix 1
Description of Legal Requirements for Currency Eligibility,
Section ii.

T he addition of a new currency eligible for settlement in the CLS System requires the fulfillment
of specified eligibility criteria contained in Rule 3. A copy of the CLS Bank Rules is available at:
http://www.cls-group.com/Membership/Pages/Criteria.aspx.

www.cls-group.com 11

Sovereign Credit Rating

To ensure the resilience of the CLS system, the CLS Rules
and Member Handbook require that a jurisdictions long-term
sovereign credit rating must be, at minimum, a Standard and
Poors or Fitchs BB- or a Moodys Ba3. CLS is currently
redefining some of the terms of its credit risk policy to ensure
broad and safe access to its settlement system.
Legal Matters and Anti-Money Laundering
(AML) Requirements
Legal Matters
The addition of a new settlement currency in the CLS system
also requires the fulfillment of specified legal eligibility criteria,
including requirements that:
(i) CLS Bank has 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 the books of CLS Bank International and
(ii) Pay-ins and other settlement-related payments received by
CLS through the relevant payment system for such currency;
and
(ii) CLS has received a legal opinion that is in form and
substance satisfactory to CLS addressing finality of
settlements and of payments made to and from CLS Banks
account with the relevant central bank and such other legal
considerations as CLS may require.
Moreover, Principle 1 of the PFMI requires a financial market
infrastructure to have a well-founded, clear, transparent,
and enforceable legal basis for each material aspect of its
business. (See Sections ii and iii of Appendix 1).
AML Considerations
CLS is required to comply with the Bank Secrecy Act and the
USA Patriot Act, including a customer identification program.
CLS is also subject to the regulations of the Office of Foreign
Assets Control (OFAC).
To comply with these requirements, CLS implements AML and
OFAC related compliance programs. These programs require
completion of specific due diligence requirements and ongoing
monitoring of the activity processed within CLS.

12 Currency Program Briefing Book

Prior to permitting a currency to become CLS eligible, CLS

undertakes a due diligence review of the AML/Terrorist
Financing Regime (AML/CTF Framework) in place in the
relevant jurisdiction to assess whether key requirements of the
Financial Action Task Forces 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 create risks to CLS. 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,
a due diligence review of the AML/CTF Framework in place
within the prospective Settlement Member is undertaken. The
due diligence review includes onsite visits with the prospective
Settlement Member.
Acceptable Currency Restrictions
A currency is not required to be fully convertible to be CLS
eligible, and CLS currently supports currencies that are not
fully convertible. However, in jurisdictions where FX exchange
controls exist, it must be clear to CLS as a matter of law and/
or regulation that fundamental processes relating to CLS
payments are possible without unduly burdening CLS with
reporting requirements and without subjecting CLS to potential
legal liability.
CLS does 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.
CLS recognizes 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 a common
understanding is reached between CLS and 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
regulation. CLS does not accept any responsibility or civil
or criminal liability for any non-compliance by a Settlement
Member or its third party customers and CLS will not undertake
any monitoring obligations with respect to compliance with
those laws and regulations. (See Section iv of Appendix 1).

Domestic Support
The process of on-boarding a currency to CLS requires
commitment and support from the relevant central bank.
In addition, the central banks support of banks within its
jurisdiction performing the roles of Settlement Members,
Liquidity Providers and Nostro Agents is fundamental.
It is expected, though not required, 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 roles of
Liquidity Provider and Nostro Agent are also important to
achieve the full benefits of CLS risk mitigation. There is no
requirement for Liquidity Providers or Nostro Agents to be
Settlement Members, though often a Settlement Member
will have multiple roles within the CLS community. There is,
however, a requirement that each currency have at least three
Liquidity Providers in most investment grade jurisdictions.

Core Hours of Operation

CLS

operates 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, the
RTGS system is expected to open between 06.00 and 07.00
CET and notify CLS of its readiness to commence settlement.
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 and North America.
Resilience

Since
failure to make payments in one currency will affect
payments and settlement in other currencies, CLS suggests
all components of the architecture of an RTGS system be
duplicated across separate sites, thus avoiding exposure to
single component failures.

Operational Requirements
The CLS service is delivered using highly secure, resilient and
available network connections and strong encryption. The
following summary provides the key technical requirements
needed for central banks to participate in CLS.
Architecture
CLS requires an RTGS system that can make timely
transfers of central bank funds to and from CLS account
at the central bank.
CLS asks all new jurisdictions to have their RTGS systems
connect to CLS through the SWIFT Network using FIN
messages. If an RTGS system uses FIN messages over the
SWIFT network for their domestic transfers, CLS can connect
in the same way as a domestic commercial bank. Other
RTGS systems use a proprietary (non-SWIFT FIN based)
message protocol. In this case, the central bank will be
asked to acquire an application for converting to SWIFT FIN
messages. Some central banks require commercial banks to
have a local terminal connected to the RTGS system. CLS
does not expect to run local terminals in order to access
RTGS systems in new jurisdictions.

Each
RTGS system is expected to send SWIFT FIN messages
for each movement in CLS account in real-time. The RTGS
system is also expected to send account statements to CLS
on demand (for intraday reconciliation) and at the end of the
RTGS system business day.

www.cls-group.com 13

The Settlement
Membership
Process
For a detailed review of the Settlement
Membership process please request
CLS Membership Evaluation Guide
from your CLS contact or email
currencyprogram@cls-group.com.

Central Bank
Commitments
Legislative Changes

To address the legal requirements of finality

and netting necessary for a currency to be
CLS eligible, legislative or regulatory changes
are usually required. CLS and its local
counsel will work closely with the central
bank and other regulators, as appropriate,
to determine what changes in law and
regulation are required to ensure that CLS
requirements are met in this regard so CLS
is satisfied as to its obligations with respect
to the PFMI.
RTGS System
During the process for inclusion of a currency in CLS, the
central bank and CLS will conduct a thorough analysis of the
Operational and IT requirements involved, and what changes
and potential developments will need to take place. Once
these are completed, rigorous testing and trialling of payments
through the RTGS system is performed.
Domestic Support
Central banks are expected to encourage qualified banks in
their markets to play a role as Settlement Members, Liquidity
Providers and/or Nostros. While CLS will engage directly with
the local banking community, the support of the central bank is
integral to the success of this effort.

14 Currency Program Briefing Book

Settlement Member
Commitments
Joining CLS as a Settlement Member

Price Per Transaction

The process for joining CLS as a Settlement

Member is not required to be simultaneous
with the on-boarding 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.

The current CLS pricing policy is based on a tariff with two

components; settlement values and volume of payment
instructions submitted to CLS. Approximately 70% of the
transaction fees are based on settlement values and 30%
are based on volumes.
The tariff table applies to all Settlement Members and is
structured to provide a sliding scale of prices that take into
consideration the individual Settlement Members usage (for
volume pricing) and the overall total usage by all Settlement
Members for that month (for value pricing). With other
factors in the pricing policy remaining constant, the greater
the individual Settlement Members usage and the greater
the overall usage, the lower the unit price will be. The unit
prices are calculated monthly; accordingly, the unit prices
vary monthly.

Shareholder and Settlement Membership

The prospective Settlement Member, or one of its affiliates,
is required to become a shareholder of CLS Group Holdings
AG. In addition, the Settlement Member is responsible for an
initial account opening fee of GBP150,000 and annual
account maintenance fees of GBP120,000 (or GBP80,000
for a central bank.
IT Commitments
CLS requires 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 to
be sent and received and the Settlement Members SWIFT
messaging tier.

Contact Information
at CLS
Please send inquiries to currencyprogram@cls-group.com
For additional information on CLS Bank, refer to
www.cls-group.com

www.cls-group.com 15

Appendix 1:
Description of Legal
Requirements for
Currency Eligibility
i. Introduction to Legal Framework
for the CLS System
The legal foundation for the CLS System is governed by the CLS Bank
International Rules (the Rules), the CLS Bank International Member
Handbook (the Member Handbook), and the form of Member Agreements
(each, a Member Agreement, and together with the Rules and Member
Handbook, the CLS Documents). The Member Agreement, an identical
version of which is signed by all Members, is governed by New York law
and creates a legally binding relationship among CLS Bank, CLS Services
Ltd. (a CLS Bank affiliate), and the Member-signatory. Most importantly, it
binds all parties to the Rules and Member Handbook, which establish the
framework and guidelines that govern and set parameters for the delivery
of the CLS settlement service. The Rules and Member Handbook are
governed by English law.
Additionally, CLS Bank complies with the Committee on Payment
and Settlement Systems (CPSS) and the Technical Committee of
the International Organization of Securities Commissions (IOSCO)
Core Principles for Systemically Important Payment Systems (January
2001) (the Core Principles). Principle 1 of the PFMI requires a
financial market infrastructure, including CLS Bank, to have a wellfounded, clear, transparent, and enforceable legal basis for
the material aspects of its business. (Please see Appendix A for the
text of Principle 1). CLS Bank will only add a new currency to the
CLS System if it is satisfied that it will be able to fulfill its obligations
under the PFMI. CLS Bank has Members with head or home offices in 24
jurisdictions (the CLS Jurisdictions).9 Each of the CLS Jurisdictions has a
well-founded, clear, transparent, and enforceable legal basis legal basis
supporting the CLS System, confirmed by CLS Bank on an annual basis
through legal opinions satisfactory to CLS Bank. Copies of the opinions are
accessible by Members through a secure website and also are provided to
the central banks that participate in the CLS Oversight Committee.

ii. Overview of Currency Eligibility Requirements

The addition of a new settlement currency in the CLS System requires
the fulfillment of specified eligibility criteria contained in Rule 3 and the
strong endorsement and participation of the local central bank and the
relevant government agencies. Pursuant to Rule 3, the CLS Bank Board
of Directors, in its sole discretion, may designate a currency as an Eligible
Currency only if such currency satisfies each of the following criteria:
(a) CLS Bank has received a written request by two or more of the
shareholders of its parent company to designate such currency as
an Eligible Currency.
(b) CLS Bank has received indications from at least three institutions
(or such fewer number as the CLS Bank Board of Directors shall
expressly approve) of willingness to act as liquidity providers for such
currency on commercially acceptable terms, as determined
by CLS Bank.
(c) CLS Bank has determined to its satisfaction that the currencys
relevant payment system(s) would meet CLS Banks payment system
requirements, including opening hours that sufficiently overlap with the
CLS System.
(d) CLS Bank has deemed reasonable the cost of inclusion of such
currency.
(e) CLS Bank has determined that adequate risk reduction would result
from the inclusion of such currency to justify the investments necessary
to include it.
(f) CLS Bank has determined that any exchange restrictions or similar
conditions on the transferability of such currency are acceptable to
CLS Bank. (Please see Section IV below for greater detail.)
(g) CLS Bank has determined that the convertibility, liquidity and historical
volatility of such currency, the stability of the banking system and rule
of law applicable in the jurisdiction of such currency, and other mitigating
issues are acceptable to CLS Bank.
(h) The relevant central bank has agreed to (i) allow CLS Bank to establish
a special account with such central bank solely for the purpose of
facilitating transfer of an Eligible Currency from and to Settlement
Members, (ii) permit a means of operational access to the account
acceptable to CLS Bank, and (iii) contractual arrangements that are
satisfactory to CLS Bank.
(i) CLS Bank has received a legal opinion in form and substance satisfactory
to CLS Bank addressing finality of payments made to and from CLS
Banks account with the relevant central bank and such other legal
considerations as CLS Bank may require. (Please see Section III below
for greater detail.)
(j) CLS Bank has 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 in the CLS System and (ii)
pay-ins and other settlement-related payments received by CLS Bank
through the relevant payment system for such currency.

T hose jurisdictions are Australia, Belgium, Canada, Denmark, England, France, Germany, Hong Kong, Israel, Italy, Japan, Luxembourg, Mexico,
New Zealand, Netherlands, Norway, Scotland, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, and the United States.

16 Currency Program Briefing Book

iii. Key Legal Requirements for CLS Jurisdictions

B. Unity of Account/Netting

In order to ensure compliance with Principle 1 of the PFMI, CLS Bank must
receive satisfactory legal opinions regarding, among other things, the
enforceability of finality of funding and settlement, unity of account/netting, and
default arrangements in the CLS Jurisdictions. In the majority of those
jurisdictions, the opinions are based upon specific finality and netting legislation
that only applies to systems designated in that jurisdiction pursuant to the
legislation.

CLS Bank maintains a single multicurrency account for each Settlement

Member on its books and records. Each Settlement Member account with
CLS Bank is considered a single account, even though it may hold multiple
currencies. Accordingly, if CLS Bank terminated a Settlement Member
and closed-out such Settlement Members account, CLS Bank would have
a claim or an obligation to receive or pay only the net balance. CLS Bank
obtains a legal opinion from its counsel in each CLS Jurisdiction providing
assurance that under applicable law, unity of account would be respected.

A. Finality of Settlement and Funding

Settlement of payment instructions occurs on a gross basis between
Settlement Members, while funding between CLS Bank and its Settlement
Members accounts in the CLS System occurs on a net basis. Although
funding and settlement are legally separate processes, the two processes are
linked and run in parallel operationally.
1. Settlement. Settlement occurs when CLS Bank simultaneously debits and
credits the accounts of two Settlement Members, respectively,
in accordance with eligible payment instructions that were submitted
by the Settlement Members. The obligations of the two Settlement Members
through whose accounts such payment instructions have been settled are
discharged upon the debiting or crediting of their respective accounts to the
full extent permitted by applicable law.
2. Funding. Funding is the process by which a Settlement Member transfers
currencies into CLS Banks central bank accounts through the payment
systems approved by CLS Bank for effecting those transfers.
As part of the funding process, CLS Bank will credit a Settlement Members
account when it is notified of payments received in its central bank accounts.
CLS Bank will disburse funds from its central bank account to a Settlement
Member through an approved payment system and debit the Settlement
Members account accordingly.
3. Finality of Settlement and Funding. The concept of finality of settlement
and funding may be expressed, in general terms, as protection from
insolvency and other laws that might otherwise permit a post-settlement
reversal of payment instructions or a post-settlement clawback of settled
amounts through the CLS System. CLS Bank obtains a legal opinion from its
counsel in each CLS Jurisdiction providing assurance that under applicable
law, settlement and funding are final across the books of CLS Bank, even
after the commencement of an insolvency.
4. Finality Legislation. In the majority of CLS Jurisdictions, settlement
and funding may only be final and irrevocable, and the unity of multicurrency
accounts respected, if a payment system has been granted special statutory
protections by the relevant governmental or regulatory authority (typically
the central bank). For example, in the European Union member states,
CLS Bank is a designated system under the EC Settlement Finality
Directive Directive 98/26/EC of the European Parliament and of the
Council of May 19, 1998 on settlement finality in payment and securities
settlement systems, and the Financial Markets and Insolvency (Settlement
Finality) Regulations 1999 that implement the Settlement Finality Directive
in the United Kingdom (each as amended). CLS is also designated in
Singapore, Hong Kong, Canada, Australia, and South Africa, among others.

C. Default Arrangements
In the context of a designated system (such as CLS Bank), default
arrangements are the arrangements put in place by the designated
system to limit systemic and other types of risks that arise in the event
of a participant appearing to be unable, or likely to become unable,
to meet its obligations in respect of the designated system. Some
examples of CLS Banks default arrangements are set forth below.
1. Ability to Access Liquidity Facilities. A Settlement Members failure
to timely satisfy a funding obligation may result in insufficient funds
in a particular currency. Under CLS Banks liquidity facilities, each
liquidity provider agrees to enter into either foreign exchange swap or
outright foreign exchange transactions at market rates upon short notice
from CLS Bank. CLS Bank will use funds in its central bank accounts
to execute foreign exchange transactions with a liquidity provider to
exchange a CLS Bank long currency position (i.e., the currency in
which the defaulting Settlement Member has a long balance) with the
currency that CLS Bank needs in order to make any required payments
to other Settlement Members in the short currency (i.e., the currency the
Settlement Members were expecting to receive with respect to settled
payment instructions in the currency in which the defaulting Settlement
Member has a short position). Liquidity providers have priority for
repayment of any obligations owed to them by CLS Bank over amounts
due to Settlement Members with respect to settled payment instructions.
In addition, the costs associated with CLS Banks draw on a liquidity
facility will be charged to the Settlement Member whose failure to timely
satisfy a funding obligation prompted the draw.
2. Combined Loss Allocation. CLS Bank will allocate certain losses
to Settlement Members, including a mark-to-market loss originating
from a Settlement Members failure to cover a short position in its
account coupled with a significant market move in excess of the haircuts
applied to each currency balance in the Settlement Members account.
Any combined loss allocation is mandatory and is assessed on those
Settlement Members with settled payment instructions with the failing
Settlement Member on the failure date. The assessment cannot exceed
a Settlement Members bilateral net receives with the failing Settlement
Member on the failure date.
3. General Loss Allocation. CLS Bank will also, in certain circumstances,
assess a general loss allocation on all Members (at a capped amount for
each Member) to cover any mark-to-market loss not fully recovered from
Settlement Members through combined loss allocation or may result from
certain operating losses, liabilities related to central bank and approved
payment systems, or certain governmental actions.

www.cls-group.com 17

iv. Exchange Control Regimes and Prospective CLS Currencies

One of the criteria for a currencys designation as an Eligible Currency
is that any exchange restrictions or similar conditions on the transferability
of the currency are acceptable to CLS Bank. In addition, CLS Bank requires
that the legal opinion for the related jurisdiction must confirm that CLS Bank
and its legal framework are not contrary to the exchange controls in that
jurisdiction.
CLS Bank notes that Article VIII, Section 2(b), of the Articles of Agreement
of the International Monetary Fund provides in relevant part that [e]xchange
contracts which involve the currency of any member and which are contrary
to the exchange control regulations of that member maintained or imposed
consistently with [the Articles of] Agreement shall be unenforceable in the
territories of any member (emphasis added).10 Thus, it is critically important
that any potentially applicable exchange controls must be analyzed and
addressed prior to the admission of a new currency in the CLS System.
A prospective currency, however, is not required to be fully convertible to
be CLS-eligible. Among the seventeen currencies designated as Eligible
Currencies are the South Korean won, the South African rand, and the
Singapore dollar, all of which are subject to exchange controls.
In jurisdictions where exchange controls exist, CLS Bank seeks to reach
a common understanding with the relevant central bank as to the scope
of underlying transactions for which payment instructions may be submitted
to CLS Bank for settlement and the impact, if any, that the exchange
controls would have on related payments, in each case with respect to CLS
Bank, its affiliates, its Settlement Members,11 its liquidity providers, nostro
agents, and third party customers12 of Settlement Members. In addition,
CLS Bank seeks to understand and confirm that existing exchange controls
will not have an adverse effect on fundamental CLS Bank processes
(including finality of settlement and funding, unity of account, and netting
arrangements discussed above).

A. Permitted Foreign Exchange Transactions

An initial topic for discussion between CLS Bank and the central bank
of a prospective currency is which CLS Bank-eligible underlying
transactions will be eligible for settlement in CLS Bank (commonly referred
to as permitted transactions). Important factors in this discussion are the
applicable exchange controls and policy objectives that the central bank
has set for its currency. While within the central banks discretion, the
following factors are frequently taken into account by a central bank
in determining permitted transactions:
Type of underlying transaction 13

Residency of the parties to the underlying transaction (resident or

non-resident party)

Currencies involved (prospective currency and foreign currencies).

CLS Bank seeks to understand whether payment instructions relating to all
of the underlying transactions permitted under the CLS Bank Documents
are permitted under and satisfy applicable exchange controls or,
alternatively, whether payment instructions relating to only a subset of those
underlying transactions would be eligible for settlement in CLS Bank. For
example, prior to designating the South Korean won an Eligible Currency,
CLS Bank worked with the Bank of Korea and the South Korean Ministry
of Strategy and Finance to clarify which CLS Bank-eligible underlying
transactions were permissible under South Korean exchange control laws
and would be eligible for settlement in CLS Bank. Ultimately, permitted
transactions were distinguished on the basis of type, objective or purpose,
parties, residency of the parties, and currencies involved, and the South
Korean exchange control regulations were amended accordingly. As a
result of those amendments, payment instructions relating to a subset of
CLS Bank-eligible underlying transactions are eligible for settlement in CLS
in South Korea.

B. Related Payments
Another topic for discussion between CLS Bank and the central bank
of a prospective currency is whether any related exchange controls or
central bank policy objectives would impede funding under the CLS Bank
Documents. In certain jurisdictions, there may be restrictions on payments
involving the prospective currency. Accepting that these restrictions may
be in place, CLS Bank seeks to understand whether any exchange control
issues arise in the context of the flow of funds that are necessary for CLS
Bank to perform in accordance with the CLS Bank Documents and its
obligations thereunder.
Where a central bank has concerns that the funding required under the CLS
Bank Documents would give rise to exchange control issues, CLS Bank
undertakes a thorough review with the central bank of each aspect of the
CLS settlement service within the exchange control framework.
Additionally, CLS Banks Settlement Members must take responsibility
that they comply, and their underlying transactions and related payments
comply, with the jurisdictions law and regulations in all respects. CLS
Bank does not accept any responsibility or civil or criminal liability for any
non-compliance by a Settlement Member or its customers and will not
undertake any monitoring obligations with respect to compliance with those
laws and regulations.

Objective or purpose of the underlying transaction

Parties to the underlying transaction 14

10

International Monetary Fund members include CLS Jurisdictions.

11

S ettlement Members may be resident financial institutions or non-resident financial institutions using the nostro services of affiliated or
unaffiliated resident institutions.

12

Third party customers of a Settlement Member may be resident or non-resident banks, non-bank financial institutions, corporations, or funds.

The CLS Bank Documents permit Members to submit payment instructions relating to foreign exchange transactions
and over-the counter credit derivative transactions for settlement by CLS Bank.
13

14

Parties to the underlying transaction may be Members or their third party customers.

18 Currency Program Briefing Book

C. Restrictions or Requirements Affecting CLS Bank, Settlement

Members, Liquidity Providers, or Nostro Agents or Third Party
Customers of Settlement Members
Set forth below are key considerations for CLS Bank when exchange
restrictions or similar conditions exist in a jurisdiction (i) whose currency
is being considered for eligibility in the CLS settlement service or (ii)
with resident institutions being considered for direct participation in the
CLS settlement service as Settlement Members. As a financial market
infrastructure, CLS Bank examines these considerations in detail with the
relevant regulatory authorities and its local counsel prior to on-boarding a
prospective currency or prospective resident Settlement Member to ensure
that the legal basis for fundamental CLS processes, including applicable
exchange restrictions or similar conditions, provide a high degree of
certainty for the CLS settlement service in the relevant jurisdiction.
CLS Bank welcomes the opportunity to discuss with the relevant central
bank how these considerations would be treated under existing exchange
controls. In that regard, CLS actively engages with relevant central banks
to assess each issue with the purpose of identifying and achieving any
necessary resolutions based on the relevant facts and circumstances.

CLS Bank and its Liquidity Providers

Neither CLS Bank nor any of its affiliates may be exposed to any aiding
and abetting type liability in connection with settlement in CLS Bank of
any underlying transaction that may be in violation of applicable exchange
restrictions or similar conditions.

CLS Bank may not be required to obtain a license in order to conduct

the activities required to provide the CLS settlement service.

CLS Bank must be able to establish a deposit account with the

central bank and use such account for all purposes related to the
CLS settlement service.15

CLS Bank must be able to (i) receive payments to CLS Banks central
bank account (pay-ins) of each Eligible Currency, including the
prospective currency, from each Settlement Member and (ii) make
payments of each Eligible Currency, including the prospective currency,
from CLS Banks central bank account (pay-outs) to each Settlement
Member.

CLS Bank must be able to maintain a multicurrency account on its books

which includes each Eligible Currency, including the prospective currency,
for each Settlement Member.

CLS Bank must be able to extend short positions on its books

in each Eligible Currency, including the prospective currency,
for each Settlement Member.

CLS Bank and its liquidity providers (which may or may not be Settlement
Members) must be able to enter into a foreign exchange liquidity
agreement and transactions contemplated thereunder involving each
Eligible Currency, including the prospective currency.

CLS Bank must be able to make alternative pay-outs in each Eligible

Currency, including the prospective currency, to any Settlement Member.

CLS Bank must be able to receive payments in each Eligible Currency,

including the prospective currency, from any Settlement Member in
response to a loss allocation assessed by CLS Bank.

Settlement Members and their Nostro Agents and

Third Party Customers
Settlement Members must be able to submit payment instructions
involving any Eligible Currency, including the prospective currency, for
settlement in CLS as long as the underlying transactions and related
payments comply with applicable exchange restrictions or similar
conditions.

Settlement Members must be able to offer CLS settlement services to

their third party customers and submit payment instructions involving
any Eligible Currency, including the prospective currency, on behalf of
their third party customers for settlement in CLS Bank so long as the
underlying transactions and related payments comply with applicable
exchange restrictions or similar conditions.16

Each Settlement Member must be able to maintain an account in the

prospective currency or establish a nostro account with a resident
institution (each a local account), and make and receive pay-ins and
pay-outs of the prospective currency from and to this account with CLS
Banks central bank account.

Each Settlement Member must be able to receive alternative pay-outs in

any Eligible Currency, including the prospective currency, from CLS Bank.

Each Settlement Member must be able to make payments in any Eligible

Currency, including the prospective currency, to CLS Bank in connection
with a loss allocation.

Each Settlement Member must be able to participate in In/Out swap

transactions involving any Eligible Currency, including the prospective
currency. In addition, CLS Services Ltd., an affiliate of CLS Bank, must
be able to provide calculation services in support of the In/Out swap
program.

Each Settlement Member must be able to convert funds in the

prospective currency that have been deposited in its local account (i.e.,
exchange its prospective currency funds into a foreign currency with a
resident institution) and remit such converted amounts overseas.

15

F or each eligible currency, CLS Bank connects directly to the central banks real-time gross settlement system and CLS Bank holds an account
with each applicable central bank, through which funds are received and paid.

16

The arrangements between Members and their third party customers are private bilateral arrangements that do not directly involve CLS Bank.
However, these arrangements likely require payments between the Member and its third party customers arising from underlying transactions
that the Member submits to CLS Bank for settlement on behalf of the third party customer, and must generally be unrestricted in the same or
similar manner as described above for CLS Bank and its Members.

www.cls-group.com 19

 Under the CLS Bank Documents, Members may submit payment

instructions relating to underlying transactions entered into by parties
that may or may not be the Members third party customers (which may
involve the prospective currency). For example, a Members customer
may be acting as an intermediary between the Member and the
intermediarys own customer that is the counterparty to the transaction.
CLS Bank seeks to understand what these parties standing would be
under applicable exchange restrictions or similar conditions.
Please send all inquiries to currencyprogram@cls-group.com.
For additional information on CLS Bank and the CLS settlement service,
please refer to www.cls-group.com.

Appendix A
Principle 1 of the PFMI17
Principle 1: Legal basis
An FMI should have a well-founded, clear, transparent, and
enforceable legal basis for each material aspect of its activities
in all relevant jurisdictions.

Key considerations:
1. T
 he legal basis should provide a high degree of certainty for each
material aspect of an FMIs activities in all relevant jurisdictions.
2. An FMI should have rules, procedures, and contracts that are clear,
understandable, and consistent with relevant laws and regulations.
3. An FMI should be able to articulate the legal basis for its activities to
relevant authorities, participants, and, where relevant, participants
customers, in a clear and understandable way.
4. An FMI should have rules, procedures, and contracts that are enforceable
in all relevant jurisdictions. There should be a high degree of certainty that
actions taken by the FMI under such rules and procedures will not be
voided, reversed, or subject to stays.
5. An FMI conducting business in multiple jurisdictions should identify
and mitigate the risks arising from any potential conflict of laws
across jurisdictions.

17

For a full version of the PFMI, including the explanatory notes for Principle 1, see www.bis.org/publ/cpss101.htm.

20 Currency Program Briefing Book

www.cls-group.com 21

www.cls-group.com

Please send enquiries to currencyprogram@cls-group.com

US
Financial Square
32 Old Slip, 23rd Floor
New York NY 10005
US
tel: +1 212 943 2290
fax: +1 212 363 6998

UK
Exchange Tower
One Harbour Exchange Square
London
E14 9GE
United Kingdom
tel: +44 (0)20 7971 5700
fax: +44 (0)20 7971 5729

Japan
Mitsui ni-Goukan, 2-1-1
Nihonbashi Muromachi
Chuo-ku
Tokyo 103-0022
Japan
tel: +81 (0)3 3517 2791
fax: +81 (0)3 3517 2796
Hong Kong

40/F, Suite 4001 One

Exchange Square
8 Connaught Road,
Central
Hong Kong
PRC
tel: +852 3520 6000
fax: +852 3520 6006

CLS and the CLS Logo are registered trademarks of CLS UK Intermediate Holdings Ltd 2013 CLS UK Intermediate Holdings Ltd.