FX policy 04 | BIS Triennial Survey 2025: FX settlement risk – you can’t fix what you can’t measure | ShapingFX series
The global foreign exchange (FX) market has grown substantially over the years, and so has FX settlement risk. The BIS Triennial Survey,1 the most comprehensive source of information on the size and structure of the FX market, tracks developments in the FX market, including the magnitude of FX settlement risk. This paper examines the global results that were recently published in its 14th edition.
Global FX market: From billions to trillions
The global FX market as we know it is just over 50 years old. After the collapse of the fixed exchange rate system of Bretton Woods in 1973, major economies officially allowed their currencies to float. This marked the beginning of the modern era of market-determined exchange rates and free-floating currency markets.2 In the 1970s, FX trading expanded from a niche back-office function into a major line of business for large international banks.
Since then, the FX market has grown significantly, establishing itself as the largest and most liquid financial market in the world. Daily turnover has soared from below USD100 billion3 in the 1970s to around USD9.5 trillion in 2025.4
Daily [FX] turnover has soared from below USD100 billion in the 1970s to around USD9.5 trillion in 2025
The FX market’s substantial growth has been fuelled by a combination of factors, such as globalization and deregulation efforts in the 1980s and 1990s, technological innovations in the late 1990s and early 2000s like electronic trading,5 monetary policy divergence and the resulting FX volatility after the 2008 financial crisis, and the increasing internationalization of currencies from emerging markets and developing economies (EMDE) over the past 10–15 years.
FX settlement risk mitigation: The FX fix
Another factor that significantly boosted FX market activity was the establishment of CLS in 2002. CLS was created to mitigate FX settlement risk – the risk that one party delivers the currency it sold but does not receive the currency it bought. It provides payment-versus-payment (PvP) functionality, which fully synchronizes the settlement of the payment instructions underlying the two currency legs of an FX trade, resulting in simultaneous settlement.
In 1974, one year after the end of the Bretton Woods system, FX settlement risk came into the spotlight when Bankhaus Herstatt collapsed. The collapse caused failures in executing the outgoing legs of FX payments after the in-leg had already been received. The Herstatt crisis was a watershed moment for the global regulatory and central bank community,6 which led to comprehensive analysis around measures for FX settlement risk mitigation. In the early 1990s, the public sector called on the industry to develop and provide risk-reducing multicurrency services. The industry established CLS in response.7 The reliance on settlement arrangements without risk mitigation has decreased substantially over the
past 25 years, largely due to CLS.
1 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets; see bis.org/stats_triennial_surveys/index.htm2 Shaping FX // 02 Policy – The fall of Bretton Woods: FX, 50 years afloat.3 DraKoln, N. (2004) Forex for small speculators.4 According to global results; see BIS Triennial Central Bank Survey – OTC foreign exchange turnover, December 2025.5 BIS Working paper No. 710 (2018) FX market structure: evolution and implications.6 At the time, Bankhaus Herstatt had speculated in an environment with high US dollar volatility and accumulated losses that substantially exceeded its own capital. When the German regulator closed it down, counterparties incurred losses because the bank had already received payments in Deutsche marks but had not yet sent US dollar payments. This is the essence of FX settlement risk: the risk of a party paying the currency it sold but not receiving the currency it bought.7 CLS provides payment-versus-payment (PvP) functionality, wherein a party’s payment instruction in one currency and the corresponding payment instruction in the counter currency are settled at the same time.
