What was the purpose of Continuous Linked Settlement (CLS)?

Continuous Linked Settlement (CLS) was primarily established to reduce settlement risk in foreign exchange transactions. Settlement risk arises when one party completes its part of a transaction, such as delivering a currency, while the other party fails to do so. This risk is particularly pronounced in foreign exchange due to the time zone differences and the nature of the transactions, where both parties typically execute the trade in different locations and possibly at different times.

CLS addresses this risk by ensuring that the settlement of both sides of a currency transaction occurs simultaneously. By doing so, it significantly mitigates the risk that one party will default after the other party has already delivered the currency, thereby enhancing the overall stability and reliability of the forex market.

The other choices, while they may appear related, do not encapsulate the core functionality of CLS. Increasing transaction speed, eliminating correspondent banks, and decreasing processing costs do not capture the essential purpose of CLS, which is fundamentally about managing settlement risk effectively.