FX settlement risk: paying one currency without receiving the other

On June 26, 1974 the German supervisor withdrew the license of Bankhaus Herstatt, then the 35th largest bank in the country. It acted after the close of business in Germany, while the US business day was still running, as the Bank of England's Bank Underground blog recounts from its archives. Counterparties had already paid Deutsche Mark to Herstatt and were waiting for the dollar leg in New York, which never came. Banks in other countries then held back their own payments, and the New York Clearing House introduced a recall procedure on July 1, 1974.

Payment versus payment (PvP) settles both legs at once, or neither. CLS is the main PvP service for currency trades: CLS Bank began operating on September 9, 2002, settles 18 currencies, and is overseen by the Federal Reserve. Members pay in their net amounts during a five-hour window when the payment systems of all CLS currencies are open, and CLS pays out only when both legs are there. Netting reduces the cash members have to fund by about 96 percent.

Other PvP arrangements exist for currencies outside CLS. SIX, for example, describes FXS, a PvP system authorized by the Banco de España for euro area banks.

The BIS measured settlement for the first time in its 2025 Triennial Survey. Its analysis in the June 2026 Quarterly Review counts more than 14 trillion dollars of FX obligations settled on an average day in April 2025. About 36 percent settled PvP and 54 percent through methods that reduce the risk without removing it, such as netting and settlement within a banking group. About 10 percent, more than 1.4 trillion dollars a day, settled gross and bilaterally with the full principal at risk. Around a quarter of that could have used PvP and did not; for most of the rest the counterparty had no PvP access or the currency pair was not eligible.

The remaining risk sits with smaller banks, non-bank financial firms and currencies outside CLS. The BIS authors point to wider PvP access for non-banks and more currencies as the next steps. Tokenized settlement promises the same atomic exchange on a shared ledger, which the pages on wholesale CBDC and settlement finality discuss, together with the legal question of when a payment counts as final.

Another name for FX settlement risk: the risk that a bank pays the currency it sold and does not receive the currency it bought, because the counterparty fails between the two payments. It is named after Bankhaus Herstatt in Cologne, closed on June 26, 1974.

CLS settles both legs of a currency trade at the same moment on its own books and pays out only when both sides have paid in. If one side does not pay, the other side gets its money back.

According to the BIS, most trades settled with full risk involve a counterparty without PvP access or a currency or trade type that the PvP services do not cover. A quarter could have used PvP and were settled gross anyway.