How FX Settlement Works
FX settlement is the process of exchanging the two currencies in an FX transaction. CLS Group operates the primary settlement utility, mitigating Herstatt risk through payment-versus-payment (PvP).
Settlement Risk in FX
FX transactions involve exchanging two currencies, often across different time zones. Settlement risk (or Herstatt risk) occurs when one party delivers its currency but the counterparty fails to deliver theirs. Given the FX market's $7.5 trillion daily volume, this risk is systemic in nature.
CLS and Payment-versus-Payment
CLS Group was established in 2002 to address settlement risk. It operates a payment-versus-payment (PvP) mechanism: both legs of an FX trade are settled simultaneously, ensuring neither party is exposed to the full principal amount. CLS currently settles trades in 18 currencies and handles an average of $6.5 trillion per day.
The Settlement Lifecycle
After trade execution, the settlement process begins with trade matching and confirmation (usually T+0 or T+1). On settlement date (typically T+2 for spot), CLS calculates each member's net payment obligations through multilateral netting, reducing gross obligations by approximately 96%. Members then fund their accounts, and CLS simultaneously processes both currency legs.