Uncovering FX Settlement Risk: New Measures from the 2025 BIS Triennial Survey

By MarketsFN Research Team  ·  Regulation

The 2025 Methodology for Assessing FX Settlement Risk

The 2025 Triennial Survey provides a fresh stocktake on FX settlement risk, employing a new methodology jointly developed by the Global Foreign Exchange Committee (GFXC), the Markets Committee, the Committee on Payments and Market Infrastructures (CPMI), and various central banks. This methodology is aligned with the FX Global Code, specifically the revised Principle 35, which recommends that market participants utilise a specific hierarchy of settlement methods to reduce risk.

The survey classifies FX settlement into a hierarchy of five distinct methods, ranging from those that eliminate risk to those that leave participants fully exposed:

1. Payment-versus-Payment (PvP) Systems: These systems ensure that the final payment of one currency occurs if and only if the final payment of the other currency occurs.
2. Pre-settlement Netting: This process nets out multiple trades between two parties to reduce gross settlement amounts into a smaller net amount for each currency.
3. Intragroup Settlement: Settlement occurring between two entities that are part of the same banking group.
4. Settlement over Bank Accounts with Timing Controls: Methods where a dealer settles its obligation only after the counterparty has paid with finality or posted collateral.
5. Gross Bilateral Settlement: Traditional correspondent banking settlement that leaves counterparties exposed to the full value of the trade.

Quantifying the Global Landscape (April 2025)

The 2025 survey reveals that on an average day in April 2025, more than $14 trillion worth of gross financial obligations were settled globally. The data indicates that while 90% of these settlements used methods that eliminate or minimise risk, a significant portion remains vulnerable.

Just over $5 trillion, or 36% of the average daily settlement, was processed via PvP systems, which effectively eliminates FX settlement risk. This method is particularly dominant in CLS-eligible currencies, which accounted for 83% of the average daily settlement ($12.2 trillion). Within this group of major currencies, 40% of trades were settled via PvP. In contrast, only 12% of trades involving non-CLS-eligible currencies were settled through other (non-CLS) PvP systems.

The Role of Risk Mitigation Pillars

Payment-versus-Payment (PvP)

Beyond eliminating principal risk, PvP systems act as stabilising devices in decentralised markets during times of stress, preventing payment gridlocks because participants know their payments only process if incoming payments are guaranteed. The most prominent system is CLSSettlement, which settles 18 major currencies and is subject to stringent oversight by the Federal Reserve Bank of New York and other central banks. However, other PvP systems have gained ground, such as B3 in Brazil (settling BRL and USD), CCIL in India (INR and USD), CHATS in Hong Kong (HKD, CNH, EUR, IDR, MYR, THB, and USD), and Buna in the UAE (AED, EUR, EGP, JOD, SAR, and USD).

Intragroup Settlement and Netting

Intragroup settlement accounted for a substantial 35% ($4.9 trillion) of total daily settlement. While the probability of risk is lower for internal trades, it is not non-existent; in severe stress scenarios, liquidity can be "trapped" by national authorities or payment moratoriums, potentially causing credit or liquidity risks to spill over.

Pre-settlement netting remains a vital tool, covering 15% ($2.2 trillion) of total settlement. This process reduced $2.2 trillion of gross obligations to just $337 billion in net payments. The effectiveness of this method relies heavily on the legal enforceability of netting agreements across different jurisdictions. The rise of services like CLSNet, which covers over 120 currencies, has been a major driver in the increased use of netting since 2018.

The Persistent Challenge: Gross Bilateral Settlement

Despite decades of effort, $1.4 trillion (10%) of average daily settlement is still conducted on a gross bilateral basis, leaving it fully exposed to settlement risk. This figure is particularly concerning to policymakers because these transactions settle without any risk mitigation.

The 2025 survey introduced granular questions to understand why these trades do not use safer methods. Interestingly, 25% ($347 billion) of this gross bilateral settlement involved trades that were actually eligible for PvP systems. Reasons for this "missed" opportunity include operational issues (missing cutoff times), challenges managing credit exposures to correspondent banks, and the difficulty of meeting the tight payment schedules of PvP systems.

For the remaining 75% of trades not eligible for PvP, the survey identified three primary reasons:

• Lack of Counterparty Access (57%): This is a significant issue for non-bank financial institutions (NBFIs) and non-financial customers who may not have direct or indirect access to PvP systems.
• Ineligible Currency Pairs (36%): Expanding PvP to more currencies involves structural hurdles, including the need for robust legal frameworks for settlement finality and the removal of capital controls.
• Ineligible Trade Types (37%): Many PvP systems are designed for T+1 or T+2 settlement cycles. Same-day (T+0) trades often cannot meet PvP cutoff times. As jurisdictions move toward shorter securities settlement cycles, the demand for same-day FX swaps to fund these transactions may increase the volume of trades settled on a gross bilateral basis.

Historical Evolution and the Road Ahead

Comparing the 2025 data to the 2006 CPSS survey reveals significant progress. The share of settlement on a gross bilateral basis has more than halved, dropping from 32% in 2006 to 15% in 2025 (on a comparable basis). However, PvP adoption only increased modestly (from 54% to 56%) during this period. This slow growth is attributed to the rising role of non-CLS eligible currencies and the expanding market share of NBFIs, who use PvP less frequently than dealers.

For the first time, the 2025 survey also collected data on settlement fails. While fails accounted for only 0.01% ($1.5 billion) of total gross obligations, they remain a point of concern as markets move toward shorter settlement cycles. Shorter cycles reduce the time available to rectify operational issues, potentially increasing the rate of failed trades.

Future Initiatives and Innovation

The public and private sectors continue to collaborate through the CPMI, the GFXC, and the G20 roadmap to enhance cross-border payments. Efforts are focused on:

• Increasing PvP use for currently eligible trades.
• Expanding membership and currency coverage in existing systems.
• Adapting PvP for shorter settlement cycles.
• Promoting bilateral netting where PvP is not practical.

New technological frontiers are also being explored. Some private initiatives are leveraging distributed ledger technology (DLT) to enable smart contracts that execute settlement only when both parties pay. Additionally, the BIS Innovation Hub is investigating long-term solutions through projects such as Jura, Mariana, Rialto, and Agorá.

Fifty years after the Herstatt collapse, the 2025 Triennial Survey underscores that while the financial system is far more resilient, the $1.4 trillion daily exposure remains a call to action. Enhancing transparency and continuing global collaboration are essential to further reducing FX settlement risk in an evolving market.