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PvP is a settlement mechanism that serves to reduce settlement risk in FX post-trade processing. Settlement risk materialises if one party to a trade of two currencies fails to deliver the currency owed, while the counterparty has delivered the other currency owed.

The actual settlement window lasts for 5 hours from 7.00 h to 12.00 h Central European Time (CET)2. During this period of time the opening hours of all involved national RTGS systems overlap, which enables CLS Bank to perform transactions in all currencies on a real-time basis.

A good example is a USD/JPY transaction: Outside CLS, the seller settles his JPY on T-1, whilst the buyer settles the USD on T. With CLS, the two flows are simultaneously settled. This is the Payment versus Payment (PvP) principle.

Continuous Linked Settlement (CLS) is an industry initiative to eliminate the settlement risk in foreign exchange transactions. This is achieved by using a 'payment versus payment' method, which provides a simultaneous exchange of currency values through CLS Bank International.

CLS operates as a Payment versus Payment (PvP) system. Time zone differences increase the risk of one party defaulting before both sides of the trade are settled. PvP eliminates time zone risk because both sides of a transaction are settled simultaneously. Settlement in CLS is final and irrevocable.

Settlement risk exists when the contributions of both parties to a transaction are not cleared simultaneously. For example, if a U.S. bank or investor purchased euros from a European bank at 2 p.m. EST, the European bank may not be open to settle the transaction until the next day.

Continuous Linked Settlement (CLS) is a global initiative to reduce foreign exchange settlement risk by settling both legs of foreign exchange transactions simultaneously.