Mitigating settlement risk in a fragmented world | ShapingFX
In a global landscape marred by economic uncertainty and increasing geopolitical complexities, market participants are more focused than ever on mitigating risks and optimizing liquidity. As the industry grapples with these challenges, the role of CLS becomes ever more critical.
FX payment-v-payment (PVP)
International economic activity depends on the smooth functioning of cross-border payments, which often involve the settlement of an FX transaction. A key risk in FX transactions is settlement risk – the risk that one party delivers the currency it sold but does not receive the currency it bought, resulting in a loss of principal. To mitigate this risk, CLS provides FX payment-versus-payment (PvP) settlement to ensure that the final transfer of a payment in one currency occurs if, and only if, the final transfer of a payment in the counter currency takes place.
Today, CLS’s PvP service, which currently settles over USD6.5 trillion of payment instructions daily across 18 currencies, is considered the de facto market standard for tackling FX settlement risk. PvP’s importance is widely recognized by public and private sector initiatives such as the Basel Committee on Banking Supervision (BCBS), which recommends using PvP settlement where practicable, the G20 Roadmap for enhancing Cross-Border Payments, which inter alia aims to facilitate increased adoption of PvP, and the FX Global Code.