Settlement Failures in FX markets

Repercussions of Settlement Failure

Although the party that causes the failure typically has to compensate the other counterparty for any interest income lost due to the non-receipt of currency, this failure can have serious repercussions.

Apart from the (cost of) time wasted trying to resolve the issue, such failures can erode a bank’s reputation quite quickly. Also, the party causing the failure will typically have to compensate the other counterparty for any interest income lost due to the non-receipt of currency. A settlement failure may also have a snowball effect in that the receiving bank may have needed the funds to pay another obligation. Additionally, market regulators often apply fines and sanctions to banks that cause settlement failure.

One method to prevent failure in FX market settlement is netting. See in detail here.