What was established to reduce Herstatt risk?

The establishment of Continuous Linked Settlement (CLS) was specifically aimed at mitigating Herstatt risk, which arises in foreign exchange transactions when one party completes its side of the trade while the other party may default before executing its part. CLS provides a secure mechanism for settling transactions by ensuring that payment in one currency only occurs if payment in the corresponding currency is also made simultaneously. This simultaneous settlement significantly reduces the risk of one party failing to fulfill its obligation after the first payment has been made, thus enhancing the overall stability of foreign exchange markets.

Options like Instant Payment Services (IPS) and Foreign Exchange Risk Management Programs, while they play roles in improving payment systems and managing risks, do not specifically address the Herstatt risk in the context of international currency settlements. Open Banking Regulations focus more on consumer access to financial data and enhancing competition, rather than directly reducing settlement risks in foreign exchange transactions.