A Market That Outgrew Its Settlement Rails

The remaining FX settlement exposure cannot be understood as a fixed technical defect. The market that settlement systems serve has grown, changed its instruments and added new kinds of counterparties. This chapter follows those changes into the settlement lifecycle: from a trade that can enter a protected path, through fallback or failure, to the future pressure created by T+0 products, shorter securities cycles and new forms of conditional payment. The goal is to separate what has already improved from what may still strain the protection perimeter.

The market grew faster than its old map

Average daily FX turnover rose from $1.5 trillion in 1998 to $7.5 trillion in 2022, according to the New York Fed account of the market’s evolution. That is a turnover measure rather than a direct measure of settlement obligations, but it establishes the scale problem. A risk-management share applied to a market several times larger can leave a larger dollar amount exposed even if the share itself falls.

The composition of activity changed as well. Over the decade before the New York Fed article, spot trading volume stagnated while much of the growth came from FX swaps used for funding and hedging. Shorter swap maturities mean more frequent rollovers. The dollar remained on one side of about 88 percent of transactions in 2022, while the Chinese yuan had become the fifth most-traded currency, involved in about 7 percent of transactions. These facts do not show that swaps or yuan trades are unsafe. They show that settlement infrastructure must support a changing mix of products and currency relationships rather than a market whose most important needs remain constant.

The participant map also shifted. In 1998, trading between large dealers made up 63 percent of reported turnover, while dealer trading with other financial counterparties made up 19.6 percent. By 2022, dealer-dealer activity had fallen to 46.1 percent and dealer-other-financial activity had risen to 48.2 percent. Trading with non-financial counterparties fell from 17.4 percent to 5.7 percent. The New York Fed describes principal trading firms and other non-bank financial institutions as increasingly important in spot FX.

This change matters to settlement because the strongest infrastructure is not useful merely because it exists. It must be reachable by the parties to a trade, support their currency pair and product, and fit their operating process. A market with more non-bank participants and more varied execution paths can grow faster than the set of relationships that can use the same protected settlement channel.

Electronic execution adds another layer. Nearly 60 percent of trading was taking place electronically, more than twice the share observed in 1998. Dealers also increasingly internalised opposing customer flows instead of unwinding positions in the inter-dealer market; major-center dealers reportedly internalised about 80 percent of spot orders. Electronic venues and internalisation can increase competition, provide more choices and reduce transaction costs. They can also fragment the places where prices are formed and make the market harder to observe as one coherent flow.

The settlement implication is not that electronic trading causes gross bilateral settlement. The available evidence does not establish that causal chain for individual trades. The more defensible point is that the market has more interfaces: dealers, customers, non-bank firms, internal books, multi-dealer platforms and different instruments. Each interface creates a condition that a settlement system must recognise. The BIS data show that external inter-dealer trades use PvP more often than trades involving other financial institutions and non-financial customers. That pattern is consistent with an uneven perimeter, even though it does not identify a single cause.