Settlement risk (FX)

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-06

// THE SHORT ANSWER

Settlement risk is the risk that, on the day a currency deal settles, one party pays away the currency it sold and does not receive the currency it bought. Between banks much of it is removed by payment-versus-payment systems such as CLS, but on a business's own forward contracts the bank may pay its side before the client's payment arrives, and for that moment it is exposed to the whole amount, not only the change in value. Banks often manage it with a daily settlement limit for each client, separate from the forward-contract line, or by releasing their side only once the client's funds are in.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.