In the foreign exchange market, where average daily turnover is
in trillions of dollars and trades span time zones, legal
systems, and domestic payments systems, participants take on
various risks. The most serious risk is credit risk—the risk
that one party will fail to pay. Central banks, private sector
financial institutions, and domestic payments systems operators
laboured for more than a decade to develop a multi-currency
settlement system to deal with these risks. The result, the CLS
Bank, began operations in September 2002. It virtually
eliminates the credit risk inherent in foreign exchange
transactions by providing a payment-versus-payment arrangement
for settlement. The CLS Bank is regulated by the Federal Reserve
Board in consultation with the central banks that have
currencies settling through its system. At present there are
seven currencies, including the Canadian dollar. The Bank of
Canada acts as banker for the CLS Bank, providing it with a
settlement account and making and receiving payments