By what method does CLS Bank significantly reduce counterparty risk?

Understand the Problem

The question is asking about the specific method employed by CLS Bank to lower counterparty risk in financial transactions. This involves understanding the mechanisms and processes that ensure safety and reliability in foreign exchange settlements.

More Information

CLS Bank uses the payment-versus-payment (PvP) mechanism to nearly eliminate settlement risk by ensuring that the final payment of one currency occurs if and only if the final payment of the other currency also takes place.

Sources

• Continuous Linked Settlement (CLS) - snb.ch
• Settlement risk in foreign exchange markets and CLS Bank - bis.org
• Supervisory Guidance for Managing Settlement Risk in Foreign Exchange Transactions - bis.org