Settlement risk has historically been a problem in foreign exchange markets because each currency must be delivered in its home country. Due to time zone differences, several hours might elapse between a payment being made in one currency and the offsetting payment being made in another currency. Continuous Linked Settlement (CLS) is a settlement system for foreign exchange trades that eliminates this problem. The system is run by the CLS Bank International, which is a special purpose bank dedicated to settling foreign exchange trades. The bank and associated companies are owned by (as of 2009) seventy-three financial institutions, each of which owns an equal share in an overall holding company. All transactions settle through the CLS Bank during a single 5-hour window each business day. The CLS Bank is based in New York but maintains accounts in the various countries whose currencies it settles trades for. Transactions are settled on a payment versus payment (PVP) basis. Each party delivers the currency it owes to the CLS Bank. That payment is not released to the counterparty unless that counterparty deposits the offsetting payment for the transaction. Payments are netted, so each participant in the system only has to make one net payment per currency each day. Direct participation is limited to the financial institutions that are shareholders of the system. They are called Settlement Members. User Members are institutions that are sponsored by Settlement Members. They can submit settlement instructions for themselves and their clients, but their transactions flow through the accounts of their sponsoring Settlement Members. Other parties may not submit settlement instructions directly to the CLS Bank, but they may indirectly utilize the system as a client of a Settlement Member or User Member.
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