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FX settlement risk: an unsettled issue

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Listed:
  • Marc Glowka
  • Thomas Nilsson

Abstract

FX settlement risk, the risk that one party to a currency trade fails to deliver the currency owed, can result in significant losses and undermine financial stability. Netting and payment versus payment (PvP) mechanisms help to mitigate this risk. However, almost a third of deliverable FX turnover, or $2.2 trillion, was still at risk on any given day in April 2022, up from $1.9 trillion in April 2019. Settlement risk remains because existing PvP arrangements are unavailable, or unsuitable for certain trades, or market participants find them too expensive. Ongoing policy initiatives and private sector innovation aim to encourage PvP adoption for more currencies and market participants.

Suggested Citation

  • Marc Glowka & Thomas Nilsson, 2022. "FX settlement risk: an unsettled issue," BIS Quarterly Review, Bank for International Settlements, December.
    • Handle: RePEc:bis:bisqtr:2212i
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    References listed on IDEAS

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    1. Gabriele Galati, 2002. "Settlement risk in foreign exchange markets and CLS Bank," BIS Quarterly Review, Bank for International Settlements, December.
    2. Robert Lindley, 2008. "Reducing foreign exchange settlement risk," BIS Quarterly Review, Bank for International Settlements, September.
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    Cited by:

    1. Patrick McGuire & Andreas Schrimpf & Nikola Tarashev, 2022. "Foreword: OTC foreign exchange and interest rate derivatives markets through the prism of the Triennial Survey," BIS Quarterly Review, Bank for International Settlements, December.
    2. Pēteris Kloks & Patrick McGuire & Angelo Ranaldo & Vladyslav Sushko, 2023. "Bank positions in FX swaps: insights from CLS," BIS Quarterly Review, Bank for International Settlements, September.

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    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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