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Microsoft got a wake-up call when the financial crisis hit in 2008: it had billions of dollars tied up in the FX trade settlement process with 15 financial counterparties. One or more of the counterparties might fail after Microsoft had delivered its side of a FX trade but before the company had been paid by the counterparty. It was a risk that had to be mitigated. And there was an obvious solution, called Continuous Linked Settlement, a special-purpose bank that Microsoft could access through a CLS member bank. CLS essentially settles trades using a payment-vs.-payment framework to mitigate counterparty settlement risk. There was one problem: CLS uses a netting logic that Microsoft’s existing systems couldn’t accommodate.

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