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FRM Part II · FRM Exam Part II · Intraday Liquidity Risk Management

A bank has large daily FX trading activity and settles through CLS (Continuous Linked Settlement). Which feature of CLS most directly reduces the bank's FX settlement risk and its intraday liquidity needs?

CLS reduces FX settlement risk through payment-versus-payment, settling both currency legs simultaneously so neither party pays without receiving, and by netting pay-in obligations across members, which lowers the liquidity needed to settle large gross FX volumes.

  1. APayment-versus-payment settlement of both currency legs, combined with multilateral netting of pay-in obligationsCorrect
  2. BDelivery-versus-payment settlement of securities against cash in a single currency
  3. CDeferred settlement of both legs at the end of the following business day without finality
  4. DBilateral gross settlement of each leg through correspondent banks

Explanation

CLS settles the two legs of an FX trade simultaneously (payment-versus-payment), removing principal risk (Herstatt risk). Multilateral netting of pay-ins reduces the funding required. The other options describe securities DvP, deferral or gross correspondent settlement, none of which are CLS features.

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