Payment versus Payment

PvPPayment versus Payment

The same idea as delivery-versus-payment, but for two currencies. Both sides of a currency swap settle simultaneously, so neither party can pay out and receive nothing back.

For example: You agree to swap US$1m for HK$7.8m with another bank. Without this rule, you might wire your dollars in New York hours before their Hong Kong dollars arrive — and if they collapse in between, your money is gone. With it, both legs move together or neither does.

FXForeign Exchange

Swapping one currency for another. The exchange rate is simply the price of that swap.

For example: A Hong Kong company needs to pay a US supplier US$1m. It exchanges roughly HK$7.8m for that US$1m at the prevailing rate. That swap is a foreign-exchange transaction.

Herstatt risk

The risk that you pay out your side of a currency trade and the other party fails before paying you. Named after Herstatt Bank, a German bank shut down mid-settlement day in 1974.

For example: In 1974 banks had already paid Deutsche Marks to Herstatt that morning, expecting US dollars back that afternoon in New York. Regulators closed Herstatt at lunchtime. The dollars never came and the counterparties simply lost the money.

CLSContinuous Linked Settlement

A bank-owned system that settles most of the world's currency trading safely by paying both currency legs at the same time. It is the established, working solution to Herstatt risk.

For example: When two large banks trade dollars for yen, the trade typically settles through this system, which holds both legs and releases them together — removing the risk that one side pays and the other does not.

Atomic settlement

A guarantee that a set of linked steps either all happen together or none happen at all. There is no half-finished state. 'Atomic' here means indivisible, not nuclear.

For example: Think of a vending machine that will not take your coin unless the drink is ready to drop. Either you get the drink and it gets the money, or nothing moves and you keep your coin. There is no state where it has your money and you have nothing.

Netting

Adding up everything two parties owe each other and moving only the difference, instead of settling every transaction separately.

For example: Over a day, Bank A owes Bank B US$100m across many trades, and Bank B owes Bank A US$97m. Rather than moving US$197m in total, they move US$3m once. Far less cash is needed.