Why are FX markets settling for less?

If global regulators drew up a hit list of the biggest risks in foreign exchange, settlement risk would be at the top.

So, it’s positive that the Bank for International Settlements in its follow-up report to the 2025 triennial survey declared a 90% overall reduction in average daily settlement risk.

But wait. Look closer at the figures. Payment-versus-payment (PvP) settlement – which is the most reliable way of eliminating the risk – has risen from 54% of volumes in 2006 to 56% today. A feeble 2% increase in two decades.

Put simply, this small jump is a major concern and highlights a glaring amount of risk being left on the table.

PvP systems ensure that the final payment of one currency occurs if and only if the payment from the opposite counterparty occurs. As such, the avoidance of PvP adoption is confusing because while other methods may limit the risk of a counterparty failing to deliver its part of the bargain, PvP eliminates it.

Some market innovations are slow to achieve widespread acceptance because they are novel and controversial – think the NFL’s ‘tush push’ play. PvP is not in this category: it is tried and tested. Settlement giant CLS, which was launched in 2002, offers PvP for 18 of the world’s most traded currencies.

Even outside of CLS, there are new opportunities for PvP settlement popping up to cover non-CLS currencies such as the B3 Foreign Exchange Clearinghouse in Brazil, CHATS in Hong Kong, and Buna in the United Arab Emirates.

To give the industry credit, there is evidence of progress in reducing settlement risk. Beginning with the lowest hanging fruit, the total amount of gross bilateral settlements that are fully exposed to settlement risk and bear the largest risk for counterparties, were reduced from nearly a third of all trading to just 15% over the 20-year period.

However, other areas are lagging. For instance, including intragroup trading, of the 80% of average daily settlement that involves currencies that are CLS eligible, only 40% of that group was settled on a PvP basis.

As for currencies that are not CLS eligible, such as the Chinese renminbi and Turkish lira, an even smaller portion are settled via PvP. What’s more, these currencies have grown from 19% of global turnover in 2007 to 22% in 2025.

One reason for the lacklustre adoption of PvP settlement is the growing prevalence of non-bank financial institutions in FX. These counterparties settle less than half of their gross financial obligations via PvP, whereas large dealers settle nearly three-quarters of trades using the gold-standard method.

Frustratingly, within the remaining 10% of turnover that is also left on a gross bilateral basis today, the BIS report states that nearly a quarter of that volume could be eligible for PvP settlement. That these trades are left without such assurances is head scratching.

Anecdotal explanations from the BIS explain that operational issues may make it difficult for parties to make PvP cut-offs. This could be a worry for global investors with securities markets like the UK and Europe shortening their settlement times to just one day.

Block booking

Other modes of settlement have helped to mitigate counterparty risk. For example, intragroup settlement ensures that trades are settled between two entities that are part of the same banking group. However, internal settlement across borders can still be at risk of liquidity ring-fencing if the bank is distressed.

Going outside of intragroup settlement, firms can also net their FX trades between counterparties pre-settlement. This reduces the overall gross settlement risk but still leaves the transaction vulnerable overall.

At the end of the day, in times of market stress, trades using these mitigation strategies are still open to settlement risk in a way that PvP avoids.

Therefore, as the FX market continues to innovate, the lack of rapid adoption of PvP technologies for fiat rails begs whether the adoption of stablecoins is a solution worth exploring.

Over the past 12 months, there has been talk about the digitalisation of FX currency trading. LMAX Group has noted that more end-users are attracted to same-day blockchain settlement features that stablecoin offers for cryptocurrency trading.

While only 1% of stablecoin activity in 2026 has been shown to be used for real-world payments or remittances, stablecoins and FX are closing the gap on how market participants can improve FX settlement workflows.

Banks are also pushing their own tokenisation projects as a rival to stablecoins. JP Morgan’s Kinexys platform offers on-chain FX payments and settlement via its digital deposit token, JPM Coin. Citi, meanwhile, has launched a tokenised deposit platform.

Outside of the banks, the London Stock Exchange Group has also gone live with its digital settlement house that enables programmatic and instantaneous settlement both on and off chain for delivery-vs-payment and payment-vs-payment.

Much like Fifa, it’s time for the FX market to get with the times and embrace technology to add assurance to an unsure process. Whether it is video assistant referee or payment-vs-payment settlement, the days of leaving things up to chance are over.

Editing by Alex Krohn