CLS means Continuous Linked Settlement and it is designed to do away with the Herstatt risk
of default assumed by one party in a foreign currency deal.
As transactions are settled on a PvP basis, Herstatt risk
associated with these trades is virtually eliminated.
Indeed, Herstatt risk
has become a generic term to describe cross-border settlement risk for banks.
They are typically categorized as credit or solvency risk, liquidity risk, market risk, Herstatt risk, fraud risk, operational risk, legal risk, and systemic risk.
There is little reason to believe that e-money will greatly add to the credit, market, and Herstatt risks in payment systems in the short run.
systemic risk -- associated with payment systems, market transaction settlement practices and the inter-connectedness of market participants (sometimes called knock-on risk; there is a form of settlement risk known as Herstatt risk
dealing with cross-border transactions);
For example, most Asian financial markets are connected to the two largest International Central Securities Depositories--Euroclear and Cedel--which clear Asian paper in European time and give rise to Herstatt risk.
Herstatt risk arises in foreign exchange transactions when one counterparty delivers currency in one time zone and receives value in another currency and in a different time zone.
credit/systemic risk has come to be known as Herstatt risk
Indeed, finding a safe and efficient delivery-versus-payment mechanism that ensures the simultaneous settlement of payments in two or more currencies and virtually eliminates Herstatt risk
remains both a goal and a challenge for market participants.
Payments netting reduces the so-called Herstatt Risk
that one party will make a payment and the other party default before the offsetting payment is made.
arises in part because the operating schedules of national payment systems are not synchronized.