If global regulators compiled a ranking of the top threats in foreign exchange, settlement risk would claim the number‑one spot.
Encouragingly, the Bank for International Settlements reported in its follow‑up to the 2025 triennial survey that average daily settlement risk has fallen by roughly 90 %.
However, a closer look at the data shows that payment‑versus‑payment (PvP) settlement — the most effective means of eliminating that risk — has edged up only from 54 % of FX volume in 2006 to 56 % today, a modest gain of just two percentage points over twenty years.
In short, this slight increase is troubling and underscores how much settlement risk remains unaddressed.
PvP mechanisms guarantee that a currency payment is completed only when the counterparty’s matching payment is also made. Consequently, the reluctance to adopt PvP is puzzling, since alternative approaches merely mitigate — rather than eradicate — the risk of a counterparty default.
56%
Proportion of PvP-settled FX volumes
Many market innovations struggle to gain traction because they are novel or controversial — consider the NFL’s ‘tush push’ play. PvP, however, is neither new nor contentious; it is a proven solution. CLS, the settlement utility launched in 2002, provides PvP capability for 18 of the most heavily traded currencies.
Beyond CLS, additional PvP options are emerging for currencies outside its scope, including the B3 Foreign Exchange Clearinghouse in Brazil, CHATS in Hong Kong, and Buna in the United Arab Emirates.
The industry has made headway on settlement risk. By tackling the lowest‑hangling fruit — gross bilateral exposures that fully expose counterparties to settlement risk — the share of such trades has dropped from roughly one‑third of all FX activity to about 15 % over the past two decades.
Yet progress is uneven. When intragroup trades are included, only 40 % of the 80 % of average daily settlement involving CLS‑eligible currencies is conducted on a PvP basis.
For non‑CLS currencies — such as the Chinese renminbi and Turkish lira — the PvP share is even lower. Moreover, these currencies have risen from 19 % of global FX turnover in 2007 to 22 % in 2025.
A key factor behind the tepid PvP uptake is the expanding role of non‑bank financial institutions in FX. These entities settle less than half of their gross FX obligations on a PvP basis, while major dealers route roughly three‑quarters of their trades through the gold‑standard PvP method.
Frustratingly, the BIS notes that of the remaining 10 % of turnover still settled on a gross bilateral basis, nearly one‑quarter could be shifted to PvP. Leaving those trades without such protection is difficult to understand.
Anecdotal input from the BIS suggests that operational constraints may hinder participants from meeting PvP cut‑off times — a concern for global investors as securities markets in the UK and Europe move toward same‑day settlement.
Block booking
Alternative settlement approaches have reduced counterparty risk. Intragroup settlement, for instance, nets trades between affiliates of the same banking group, but cross‑border internal flows can still face liquidity ring‑fencing when a bank is under stress.
Outside of intragroup arrangements, firms may pre‑settle net their FX trades with counterparties. While this lowers gross settlement exposure, the transaction remains susceptible to risk.
Ultimately, during periods of market turmoil, these mitigation techniques still leave trades exposed to settlement risk — a vulnerability that PvP eliminates.
Accordingly, as the FX market evolves, the sluggish uptake of PvP for fiat currencies raises the question of whether stablecoin‑based settlement could serve as a viable alternative.
Over the past year, discussion has grown around digitising FX trading. LMAX Group reports that an increasing number of end‑users are drawn to same‑day blockchain settlement capabilities offered by stablecoins in the crypto space.
Although only about one percent of stablecoin activity in 2026 has been linked to real‑world payments or remittances, stablecoins and FX markets are converging on ways to enhance settlement processes.
Banks are likewise advancing their own tokenisation initiatives as competitors to stablecoins. JP Morgan’s Kinexys platform enables on‑chain FX payments and settlement through its digital deposit token, JPM Coin, while Citi has introduced a tokenised deposit solution.
Beyond the banking sector, the London Stock Exchange Group has launched a digital settlement house that provides programmatic, instantaneous settlement on‑chain and off‑chain for both delivery‑versus‑payment and payment‑versus‑payment transactions.
Just as FIFA adopted video‑assisted refereeing to improve fairness, the FX market must embrace modern technology to bring certainty to an otherwise uncertain process. The era of relying on chance for settlement is over.
Editing by Alex Krohn
