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Intermediary Accounts and CLS in Cross-Border Dollar Transfers

Article Quant Q&A · Author: KoKo
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Summary

The document explains how a foreign bank can send dollars to a US bank without physically shipping cash. The foreign bank must have access to dollars, for example through an account at an intermediary bank, and instruct that institution to transfer funds between accounts. The receiving bank relies on balances held within the banking system rather than accepting newly created dollars from the sender.

It also describes CLS as a settlement mechanism for large foreign-exchange transactions. Both parties deliver funds, represented as central bank deposits, to CLS, which transfers them onward simultaneously; if one party fails to deliver, the other party's funds are returned. These answers give a basic account of correspondent banking and payment-versus-payment settlement. The document is a short Q&A, however, and does not cover the full mechanics of dollar clearing, bank supervision, or settlement risks.

Key ideas

  • A cross-border dollar transfer can move account balances without physically transporting cash.
  • A foreign bank needs access to dollars held with an intermediary to make a transfer.
  • CLS can settle both sides of a large currency transaction simultaneously.
  • The document gives a brief overview rather than a full account of clearing and settlement.

Tags

ForexMarket microstructure
Full text
# How does US banks ensure that other country's banks aren't counterfeiting USD?


# How does US banks ensure that other country's banks aren't counterfeiting USD?












I have had this question for a long time. For example, if I wire 50M USD from China to the US, does the Chinese bank physically deliver 50M USD cash to the US bank? or is it just changing a number in the computer? If it's done digitally, then how does the US bank ensure that the Chinese bank isn't just creating USD out of thin air?

## Answer by ps0604 (score 2, accepted)

https://quant.stackexchange.com/a/14535

The bank in china has to have an account at an intermediary bank, and order a transfer from that account to the account of the US bank. Therefore the chinese bank needs to have the dollars.

## Answer by q.t.f. (score 1)

https://quant.stackexchange.com/a/14571

For large currency transactions, the big banks go through an intermediary called CLS. Both sides to a transaction transfer funds (in form of central bank deposits) to the CLS group. Then simultaneously these are transferred to the respective parties. Or if one side fails to deliver CLS returns the funds of the other party. See http://en.wikipedia.org/w/index.php?title=CLS_Group .

## Answer by Mert (score 0)

https://quant.stackexchange.com/a/14488

I am not expert but china has U.S. Treasury Bonds, so both sides does know how much bond china has and how much bonds getting converted to USD. Its all build on trust, otherwise start to stack sandbags.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.