Market participants have two main options for mitigating FX settlement risk. First, they can bilaterally offset their payment obligations to reduce the amounts that need to be settled (ie “pre-settlement netting”). Second, they can settle any remaining turnover via payment-versus-payment (PvP) arrangements or via the same clearer, termed “on-us”.
Pre-settlement netting reduced settlement risk in almost a fifth of deliverable turnover in 2022, unchanged from 2019 (Graph 1.A, blue bars). As turnover has grown, this amounts to pre-settlement netting of $1.3 trillion per day (Table 1), up from an estimated $1.1 trillion in 2019. The increase can be attributed to wider availability of automated netting services, driven also by market pressure to reduce funding costs.
In the remaining turnover to be settled, much settlement risk remains despite the broader adoption of PvP arrangements since 1997. In April 2022, $3.5 trillion of deliverable turnover was settled with risk mitigation (Table 1 and Graph 1.A, green bars). Of this, $2.5 trillion was settled via CLS. Nearly $1 trillion was settled either via other PvP arrangements or via the same clearer or on-us with loss protection. The remaining $2.2 trillion was settled via on-us without loss protection or via other non-PvP arrangements and is therefore subject to risk.
1. Graph 1.A: Adjusted for local but not cross-border inter-dealer double-counting, ie “net-gross” basis; daily averages in April; on-us settlement is where both legs of a trade are settled across the books of a single institution; respondents in 2013 and 2019 did not report whether on-us settlement was with or without loss protection.
1. Graph 1.B: Adjusted for local but not cross-border inter-dealer double-counting, ie “netgross”; daily averages in April; a few countries reported greater settled turnover than deliverable turnover in which case we use settled turnover as the denominator.
2. Turnover settled with multiple payments between counterparties (eg spot trades, outright forwards, FX swaps and currency swaps).
3 Each circle represents a country, and circle area is proportional to the deliverable turnover reported by that country.
1. Table 1: Adjusted for local and cross-border inter-dealer double-counting, ie “net-net” basis; daily averages in April; settled turnover may include trades that were executed before April but settled in April.
2. Turnover settled with multiple payments between counterparties (eg spot trades, outright forwards, FX swaps and currency swaps).
3 Pre-settlement netting is calculated as the difference between deliverable turnover and turnover settled.
Concerns remain in relation to the management of FX settlement even after implementation of action plans
ECB Banking Supervisors have stressed that FX settlement activities and correspondent banking are essential components of the global payment system and that awareness of FX settlement has increased across the board. However they have flagged concerns that remain:
