Nicholas Pratt examines the ongoing efforts to increase PvP coverage and reduce settlement risk in the FX market.
Settlement risk remains a persistent problem in the FX market despite years of efforts of mitigation. Significant progress has been made but a number of structural issues are keeping this risk alive. Firstly, payment versus payment (PvP) coverage, which has done so much to reduce settlement risk, is incomplete. Secondly, the growth of emerging market FX continues unabated, as does the involvement of non-bank participants, which bring liquidity and funding pressures respectively.
Thirdly there is a lack of standard methods and systems for FX payment processes like netting, splitting and shaping which are putting pressure on settlement systems and liquidity management, especially in the context of reduced settlement times, as seen with the move to next day settlement (T+1).
As the adoption of electronic trading increases and the volume of trading grows likewise, the move to T+1 has led regulators and supervisors to take note. The updated FX Global Code makes reference to the use of PvP where possible and some alternative approach where it is not.
There are also efforts to expand PvP coverage. A 2023 report from the Bank of International Settlements (BIS) and the Committee on Payments and Market Infrastructures (CPMI) looked at the issue and found three barriers to broader adoption – weak incentives for market participants to settle FX trades using PvP; technical challenges for PvP providers to access and interoperate with real-time gross settlement systems; and legal challenges for PvP providers to reconcile differences in national legal and regulatory frameworks. “Facilitating further adoption of PvP depends on whether providers of PvP services can overcome these barriers,” states the report.
“New solutions, if properly designed and regulated, may complement existing PvP arrangements to support a wider range of EMDE currencies, reach smaller market participants and provide enhanced functionality such as same-day (or even real-time) PvP settlement,” continues the report.
Enhancements to existing PvP arrangements and the development of new solutions can benefit from private and public stakeholders working together to address common barriers to facilitate increased adoption of PvP, according to the BIS. “The private sector could explore potential changes to conventions for value dating, align nostro operating hours, and promote integration and interoperability between legacy and emerging systems.
“Central banks could assess operational barriers to the use of central bank accounts and credit facilities by new PvP providers, including limited access to, liquidity constraints in and operating hours of RTGS systems. Finally, central banks and other public authorities could consider sharpening regulatory incentives for market participants to use available PvP services and catalyse continued private sector engagement on reducing FX settlement risk,” states the report.
According to the BIS 2025 Triennial Survey of FX markets, 90% of average daily settlement was via methods which eliminate or minimise FX settlement risk. But 10%, or $1.4 trillion, remained exposed to these risks.
Just over one third of the average daily settlement volume in April 2025, or $5.2 trillion, was settled via PvP, which eliminates settlement risk, states the report. Three other methods – intragroup settlement, pre-settlement netting, which reduces gross payment amounts to a smaller net payment, and settlement over bank accounts with settlement timing controls – all mitigate but do not eliminate FX settlement risk. Roughly $7.6 trillion, or 54% of the total, was settled via these methods.
Finally, gross bilateral settlement, which exposes the counterparties to FX settlement risk to the full trade value, made up the remaining $1.4 trillion, or 10% of total settlement, in April. The more granular survey data reveal that the main reasons for relying on this settlement method were that the counterparty did not have PvP access or that the currency pairs or trade type were not eligible for PvP settlement.
In conclusion, the BIS report states that “public and private sector stakeholders should continue their efforts to reduce FX settlement risk for a broader range of currencies and market participants”.
Sources: BIS Triennial Central Bank Survey & calculations made by authors of an article: Uncovering FX settlement risk: new measures from the 2025 BIS Triennial Survey published in the BIS Quarterly Review, June 2026
Decades of progress
The foreign exchange industry has seen decades of progress in tackling settlement risk since the collapse of Germany-based Herstatt Bank in 1974. That institutional failure exposed the importance of settlement risk in the FX market, leading to policy changes at a domestic and international level.
In Germany, the Liquidity Consortium Bank was established while at an international level, we saw the creation of the Basel Committee on Banking Supervision, designed to ensure there was some global oversight and standards as regards settlement and other market and credit risks.
More banking failures in the 80s and 90s led to the creation of CLS Bank, possibly the most important development in FX settlement risk mitigation to date. CLS’s payment versus payment (PvP) mechanism went operational in 2002 and has been a fixture of the FX market ever since as the de facto market standard for mitigating settlement risk
CLS’s payment-versus-payment (PvP) settlement mechanism, CLSSettlement, is a key factor in that success. Its value was seen in the 2008 global financial crisis, during which the FX market remained relatively stable.
Yet, PvP coverage is incomplete. As of now, CLS settles payment instructions in 18 of the world’s most traded currencies, capturing approximately 90% of the CLSSettlement-addressable market. In 2025, CLSSettlement average daily settlement values reached $8.1 trillion, with a record $22.9 trillion settled on 17 December 2025. The total funding required to settle this amount was $100 billion, a funding efficiency of just 0.5% of the gross value settled.
However, according to the 2025 BIS Triennial Central Bank Survey, there remains a proportion of FX trades not settled on a PvP basis. This has increased in recent years, largely driven by the growing share of emerging market and developing economy (EMDE) currencies in global FX turnover. As EMDE currencies account for an increasing share of global FX turnover, approximately one-third or $2.8 trillion daily, the proportion of trades exposed to settlement risk also continues to grow.
Adding new currencies to a settlement system can be a complex process subject to several high hurdles, particularly the satisfaction of crucial legal, risk and liquidity standards in the target jurisdiction. Consequently, local authorities typically determine the timing and pace of onboarding.
Where PvP is unavailable, the FX Global Code promotes a ‘risk waterfall’ approach that prioritises alternative risk mitigation measures such as netting. CLS has developed an automated bilateral payment netting calculation service, CLSNet, which is applicable to 120 currencies, including those not currently supported by CLSSettlement. This service continues to grow, and in 2025, its average daily netted value was $171 billion, up 12% year-on-year. EMDE currencies (non-same day) processed in CLSNet accounted for nearly 70% of the average daily netted value.
The Global Foreign Exchange Committee (GFXC) published the latest version of the FX Global Code of Conduct in January 2025. This version places much greater emphasis on settlement risk mitigation as a core pillar of market conduct, reflecting increased regulatory concern over systemic vulnerabilities. The Code also aligns with broader global efforts, including the Financial Stability Board’s cross-border payments roadmap, which includes a dedicated workstream on increasing PvP adoption.
Payment splitting
Another process designed to reduce settlement risk in FX is the use of payment shaping and splitting. This involves dividing a large currency payment into smaller amounts, typically to manage intra-day liquidity, risk limits or bank-specific requirements, and ultimately to minimise settlement risk.
In April this year, the GFMA Global FX Division issued a paper focused on the payment splitting process and some of the associated challenges. While payment splitting reduces the volumes associated with single trades, it does increase transaction frequency, which can create pressure on settlement systems. As the GFMA notes, this pressure has intensified given that market practices are moving toward faster settlement times and T+1.
FX transaction with split/shaped payments. Source: GFMA
“When compared to the full population of daily FX settlements, the numbers of those being split/shaped remains small, and due to liquidity reasons may be more concentrated in emerging market currencies,” states the paper.
“However, if the market moves toward faster settlement timelines, including more same-day (T+0) settlements, splitting payments could become more common even in major currencies. This could increase the number of transactions that must be settled individually rather than being grouped together, which may place additional pressure on liquidity.”
Another challenge comes from the diverse systems and processes used for payment splitting. Market participants often use proprietary or non-standardised methods to allocate and communicate splits, leading to inconsistencies and reconciliation errors. For example, there are essentially two methods for payment splitting – dividing the original transaction or dividing the payment process itself.
According to the GFMA, the latter approach could increase settlement risk if there is a lack of communication or proper notification. Effective communication, especially automated, is critical for successful reconciliation.
The GFMA makes a number of recommendations. These include the adoption of automated payment splitting processes as well as automated processes for communications with counterparties. In addition, there should be greater use of industry-wide standards and protocols – for example, the use of updated ISO messages to include structured split information.
“Whilst it is unlikely that the whole market adopts a single automated approach, there is an opportunity to harmonise the format of the data being communicated,” states the paper. “Consistency would enable market participants to automate processes, improving efficiency and reducing the risks of any funds not being recognised and returned. Such a standardised formatting approach could also be adopted by those using proprietary systems, again driving consistency across the industry.”
The GFMA concludes that there are “opportunities to improve the FX payment splitting/shaping processes which will result in a reduction of FX Settlement Risk as well as improving liquidity flows and reducing overall costs”, such as those incurred though the provision of intra-day credit or through increased manual interventions.
“Such opportunities are reliant on i) increased use of and standardisation of automated approaches and ii) improvements in communications between those involved in the settlement of FX transactions,” states the paper.
Ever-increasing volumes
Settlement risk represents a material risk today due to the ever-increasing traded volume in currencies which are not supported by existing solutions, says Keith Tippell, head of FX at OSTTRA.
“The 2025 BIS Triennial Survey results show the Chinese renminbi is now the fifth most traded currency, having nearly doubled its global market share since the 2019 survey. In addition, strong economic growth is driving increased trading in a range of other currencies including the Polish zloty and Thai baht.” Tippell states that safe settlement remains a priority for market participants and OSTTRA is addressing these needs with a pragmatic service model which is specifically designed for the needs of these growing currency markets.
Electronic FX trading, along with other factors such as the availability of FX prime broking services, has led to a significant increase in currency trading. Inevitably, the total notional value of settlement risk has increased, and settlement risk limits have become strained, says Tippell.
“A well-adopted PvP service for the six to ten largest deliverable currencies, which currently do not benefit from PvP protection, would mitigate the vast majority of the current market FX settlement risk.”
Keith Tippell
“FX liquidity risk is the danger that an entity cannot meet short-term currency obligations. PvP services, such as OSTTRA PvP Settlement Orchestration, help mitigate the risk of a currency shortfall and provide transparency at times of market stress – this allows market participants to react and take appropriate funding actions,” says Tippell.
Practical frameworks for closing the remaining gaps in settlement risk mitigation will be based on PvP services which are initially based on bilateral netting, have flexibility in terms of the timing of funding requirements, support splits for funding obligations and exhibit an overall currency funding footprint which doesn’t create liquidity pinch points, says Tippell.
“In addition, close partnering with local market participants and a service model which has the flexibility to work optimally alongside the local market infrastructure will be key to closing the remaining mitigation gaps.”
While PvP services have been a critical development in the mitigation of FX settlement risk, they have not yet reached all parts of the FX market. “Asian currencies such as the Chinese renminbi and the Thai baht, Eastern European currencies such as the Polish zloty and Czech koruna and Middle East currencies such as the United Arab Emirates dirham and Saudi riyal, are most typically cited by major market participants as the most underserved by existing PvP solutions,” says Tippell. “All these currencies are part of the roadmap for OSTTRA PvP Settlement Orchestration.” Local market dynamics are not directly limiting broader adoption of settlement risk mitigation tools, says Tippell.
Close partnering with local market participants and a service model which has the flexibility to work optimally alongside the local market infrastructure will be key to closing the remaining mitigation gaps
“It’s a case of one model doesn’t fit all and the onus is on PvP service providers to support functional and operational models which respect local market dynamics and conventions – this will lead to optimal service provision for local and international market participants,” says Tippell.
There is clear industry momentum for reducing settlement risk. For example, the updated FX Global Code is explicit. Under Principle 35’s settlement mitigation hierarchy, it states: “Where practicable, market participants should eliminate settlement risk, for example by using settlement services that provide PvP settlement”.
OSTTRA’s mission is to ensure it’s practicable to use its PvP settlement service for a wide range of currencies which do not currently benefit from PvP protection, says Tippell. “This focus on settlement-risk mitigation is strongly supported by global regulators given the increase in trading of currencies which currently fall out of scope for PvP protection. A major settlement event in the larger of these currencies could lead to a broader, market-wide, systemic event.
“A well-adopted PvP service for the six to ten largest deliverable currencies, which currently do not benefit from PvP protection, would mitigate the vast majority of the current market FX settlement risk. OSTTRA believes this is achievable in the next three to five years,” says Tippell.
Closing the remaining gaps in FX settlement risk mitigation
Nicholas Pratt examines the ongoing efforts to increase PvP coverage and reduce settlement risk in the FX market.
Settlement risk remains a persistent problem in the FX market despite years of efforts of mitigation. Significant progress has been made but a number of structural issues are keeping this risk alive. Firstly, payment versus payment (PvP) coverage, which has done so much to reduce settlement risk, is incomplete. Secondly, the growth of emerging market FX continues unabated, as does the involvement of non-bank participants, which bring liquidity and funding pressures respectively.
Thirdly there is a lack of standard methods and systems for FX payment processes like netting, splitting and shaping which are putting pressure on settlement systems and liquidity management, especially in the context of reduced settlement times, as seen with the move to next day settlement (T+1).
As the adoption of electronic trading increases and the volume of trading grows likewise, the move to T+1 has led regulators and supervisors to take note. The updated FX Global Code makes reference to the use of PvP where possible and some alternative approach where it is not.
There are also efforts to expand PvP coverage. A 2023 report from the Bank of International Settlements (BIS) and the Committee on Payments and Market Infrastructures (CPMI) looked at the issue and found three barriers to broader adoption – weak incentives for market participants to settle FX trades using PvP; technical challenges for PvP providers to access and interoperate with real-time gross settlement systems; and legal challenges for PvP providers to reconcile differences in national legal and regulatory frameworks. “Facilitating further adoption of PvP depends on whether providers of PvP services can overcome these barriers,” states the report.
“New solutions, if properly designed and regulated, may complement existing PvP arrangements to support a wider range of EMDE currencies, reach smaller market participants and provide enhanced functionality such as same-day (or even real-time) PvP settlement,” continues the report.
Enhancements to existing PvP arrangements and the development of new solutions can benefit from private and public stakeholders working together to address common barriers to facilitate increased adoption of PvP, according to the BIS. “The private sector could explore potential changes to conventions for value dating, align nostro operating hours, and promote integration and interoperability between legacy and emerging systems.
“Central banks could assess operational barriers to the use of central bank accounts and credit facilities by new PvP providers, including limited access to, liquidity constraints in and operating hours of RTGS systems. Finally, central banks and other public authorities could consider sharpening regulatory incentives for market participants to use available PvP services and catalyse continued private sector engagement on reducing FX settlement risk,” states the report.
According to the BIS 2025 Triennial Survey of FX markets, 90% of average daily settlement was via methods which eliminate or minimise FX settlement risk. But 10%, or $1.4 trillion, remained exposed to these risks.
Just over one third of the average daily settlement volume in April 2025, or $5.2 trillion, was settled via PvP, which eliminates settlement risk, states the report. Three other methods – intragroup settlement, pre-settlement netting, which reduces gross payment amounts to a smaller net payment, and settlement over bank accounts with settlement timing controls – all mitigate but do not eliminate FX settlement risk. Roughly $7.6 trillion, or 54% of the total, was settled via these methods.
Finally, gross bilateral settlement, which exposes the counterparties to FX settlement risk to the full trade value, made up the remaining $1.4 trillion, or 10% of total settlement, in April. The more granular survey data reveal that the main reasons for relying on this settlement method were that the counterparty did not have PvP access or that the currency pairs or trade type were not eligible for PvP settlement.
In conclusion, the BIS report states that “public and private sector stakeholders should continue their efforts to reduce FX settlement risk for a broader range of currencies and market participants”.
Uncovering FX settlement risk: new measures from the 2025 BIS Triennial Survey published in the BIS Quarterly Review, June 2026
Decades of progress
The foreign exchange industry has seen decades of progress in tackling settlement risk since the collapse of Germany-based Herstatt Bank in 1974. That institutional failure exposed the importance of settlement risk in the FX market, leading to policy changes at a domestic and international level.
In Germany, the Liquidity Consortium Bank was established while at an international level, we saw the creation of the Basel Committee on Banking Supervision, designed to ensure there was some global oversight and standards as regards settlement and other market and credit risks.
More banking failures in the 80s and 90s led to the creation of CLS Bank, possibly the most important development in FX settlement risk mitigation to date. CLS’s payment versus payment (PvP) mechanism went operational in 2002 and has been a fixture of the FX market ever since as the de facto market standard for mitigating settlement risk
CLS’s payment-versus-payment (PvP) settlement mechanism, CLSSettlement, is a key factor in that success. Its value was seen in the 2008 global financial crisis, during which the FX market remained relatively stable.
Yet, PvP coverage is incomplete. As of now, CLS settles payment instructions in 18 of the world’s most traded currencies, capturing approximately 90% of the CLSSettlement-addressable market. In 2025, CLSSettlement average daily settlement values reached $8.1 trillion, with a record $22.9 trillion settled on 17 December 2025. The total funding required to settle this amount was $100 billion, a funding efficiency of just 0.5% of the gross value settled.
However, according to the 2025 BIS Triennial Central Bank Survey, there remains a proportion of FX trades not settled on a PvP basis. This has increased in recent years, largely driven by the growing share of emerging market and developing economy (EMDE) currencies in global FX turnover. As EMDE currencies account for an increasing share of global FX turnover, approximately one-third or $2.8 trillion daily, the proportion of trades exposed to settlement risk also continues to grow.
Adding new currencies to a settlement system can be a complex process subject to several high hurdles, particularly the satisfaction of crucial legal, risk and liquidity standards in the target jurisdiction. Consequently, local authorities typically determine the timing and pace of onboarding.
Where PvP is unavailable, the FX Global Code promotes a ‘risk waterfall’ approach that prioritises alternative risk mitigation measures such as netting. CLS has developed an automated bilateral payment netting calculation service, CLSNet, which is applicable to 120 currencies, including those not currently supported by CLSSettlement. This service continues to grow, and in 2025, its average daily netted value was $171 billion, up 12% year-on-year. EMDE currencies (non-same day) processed in CLSNet accounted for nearly 70% of the average daily netted value.
The Global Foreign Exchange Committee (GFXC) published the latest version of the FX Global Code of Conduct in January 2025. This version places much greater emphasis on settlement risk mitigation as a core pillar of market conduct, reflecting increased regulatory concern over systemic vulnerabilities. The Code also aligns with broader global efforts, including the Financial Stability Board’s cross-border payments roadmap, which includes a dedicated workstream on increasing PvP adoption.
Payment splitting
Another process designed to reduce settlement risk in FX is the use of payment shaping and splitting. This involves dividing a large currency payment into smaller amounts, typically to manage intra-day liquidity, risk limits or bank-specific requirements, and ultimately to minimise settlement risk.
In April this year, the GFMA Global FX Division issued a paper focused on the payment splitting process and some of the associated challenges. While payment splitting reduces the volumes associated with single trades, it does increase transaction frequency, which can create pressure on settlement systems. As the GFMA notes, this pressure has intensified given that market practices are moving toward faster settlement times and T+1.
Source: GFMA
“When compared to the full population of daily FX settlements, the numbers of those being split/shaped remains small, and due to liquidity reasons may be more concentrated in emerging market currencies,” states the paper.
“However, if the market moves toward faster settlement timelines, including more same-day (T+0) settlements, splitting payments could become more common even in major currencies. This could increase the number of transactions that must be settled individually rather than being grouped together, which may place additional pressure on liquidity.”
Another challenge comes from the diverse systems and processes used for payment splitting. Market participants often use proprietary or non-standardised methods to allocate and communicate splits, leading to inconsistencies and reconciliation errors. For example, there are essentially two methods for payment splitting – dividing the original transaction or dividing the payment process itself.
According to the GFMA, the latter approach could increase settlement risk if there is a lack of communication or proper notification. Effective communication, especially automated, is critical for successful reconciliation.
The GFMA makes a number of recommendations. These include the adoption of automated payment splitting processes as well as automated processes for communications with counterparties. In addition, there should be greater use of industry-wide standards and protocols – for example, the use of updated ISO messages to include structured split information.
“Whilst it is unlikely that the whole market adopts a single automated approach, there is an opportunity to harmonise the format of the data being communicated,” states the paper. “Consistency would enable market participants to automate processes, improving efficiency and reducing the risks of any funds not being recognised and returned. Such a standardised formatting approach could also be adopted by those using proprietary systems, again driving consistency across the industry.”
The GFMA concludes that there are “opportunities to improve the FX payment splitting/shaping processes which will result in a reduction of FX Settlement Risk as well as improving liquidity flows and reducing overall costs”, such as those incurred though the provision of intra-day credit or through increased manual interventions.
“Such opportunities are reliant on i) increased use of and standardisation of automated approaches and ii) improvements in communications between those involved in the settlement of FX transactions,” states the paper.
Ever-increasing volumes
Settlement risk represents a material risk today due to the ever-increasing traded volume in currencies which are not supported by existing solutions, says Keith Tippell, head of FX at OSTTRA.
“The 2025 BIS Triennial Survey results show the Chinese renminbi is now the fifth most traded currency, having nearly doubled its global market share since the 2019 survey. In addition, strong economic growth is driving increased trading in a range of other currencies including the Polish zloty and Thai baht.” Tippell states that safe settlement remains a priority for market participants and OSTTRA is addressing these needs with a pragmatic service model which is specifically designed for the needs of these growing currency markets.
Electronic FX trading, along with other factors such as the availability of FX prime broking services, has led to a significant increase in currency trading. Inevitably, the total notional value of settlement risk has increased, and settlement risk limits have become strained, says Tippell.
“A well-adopted PvP service for the six to ten largest deliverable currencies, which currently do not benefit from PvP protection, would mitigate the vast majority of the current market FX settlement risk.”
Keith Tippell
“FX liquidity risk is the danger that an entity cannot meet short-term currency obligations. PvP services, such as OSTTRA PvP Settlement Orchestration, help mitigate the risk of a currency shortfall and provide transparency at times of market stress – this allows market participants to react and take appropriate funding actions,” says Tippell.
Practical frameworks for closing the remaining gaps in settlement risk mitigation will be based on PvP services which are initially based on bilateral netting, have flexibility in terms of the timing of funding requirements, support splits for funding obligations and exhibit an overall currency funding footprint which doesn’t create liquidity pinch points, says Tippell.
“In addition, close partnering with local market participants and a service model which has the flexibility to work optimally alongside the local market infrastructure will be key to closing the remaining mitigation gaps.”
While PvP services have been a critical development in the mitigation of FX settlement risk, they have not yet reached all parts of the FX market. “Asian currencies such as the Chinese renminbi and the Thai baht, Eastern European currencies such as the Polish zloty and Czech koruna and Middle East currencies such as the United Arab Emirates dirham and Saudi riyal, are most typically cited by major market participants as the most underserved by existing PvP solutions,” says Tippell. “All these currencies are part of the roadmap for OSTTRA PvP Settlement Orchestration.” Local market dynamics are not directly limiting broader adoption of settlement risk mitigation tools, says Tippell.
Close partnering with local market participants and a service model which has the flexibility to work optimally alongside the local market infrastructure will be key to closing the remaining mitigation gaps
“It’s a case of one model doesn’t fit all and the onus is on PvP service providers to support functional and operational models which respect local market dynamics and conventions – this will lead to optimal service provision for local and international market participants,” says Tippell.
There is clear industry momentum for reducing settlement risk. For example, the updated FX Global Code is explicit. Under Principle 35’s settlement mitigation hierarchy, it states: “Where practicable, market participants should eliminate settlement risk, for example by using settlement services that provide PvP settlement”.
OSTTRA’s mission is to ensure it’s practicable to use its PvP settlement service for a wide range of currencies which do not currently benefit from PvP protection, says Tippell. “This focus on settlement-risk mitigation is strongly supported by global regulators given the increase in trading of currencies which currently fall out of scope for PvP protection. A major settlement event in the larger of these currencies could lead to a broader, market-wide, systemic event.
“A well-adopted PvP service for the six to ten largest deliverable currencies, which currently do not benefit from PvP protection, would mitigate the vast majority of the current market FX settlement risk. OSTTRA believes this is achievable in the next three to five years,” says Tippell.