In a yen-dollar trade, even when the value date is the same, the yen leg settles during Tokyo hours, before the US dollar leg settles during New York hours. The party that pays yen first bears the risk of losing the full principal from the time its payment can no longer be recalled until it receives the dollars, and this period can last several days rather than a few hours within a day1. Before the payment, the risk is limited to the cost of replacing the trade (replacement cost)1.

Consider a hypothetical example in which Bank A buys USD 10 million from Bank B at 150 yen per dollar and pays 1.5 billion yen first. If Bank B defaults before paying the dollars, Bank A may lose the entire 1.5 billion yen. Bank B, which receives yen first, normally does not face this loss1.

An example that shows the nature of this risk is Bankhaus Herstatt in Germany, which was closed on June 26, 1974. Its counterparties had already paid Deutsche marks and could not receive the dollars2. The FX Global Code defines "settlement risk" and notes that it is also called "Herstatt risk"3.

Notes

  1. Bank of Japan, "金融機関の決済リスク管理について" (Settlement Risk Management at Financial Institutions, in Japanese) (February 2000), Box 2 ("外為決済リスクについて", on FX settlement risk), pages 25–26. ↩ ↩2 ↩3

  2. Bank for International Settlements, "Uncovering FX settlement risk: new measures from the 2025 BIS Triennial Survey" (BIS Quarterly Review, June 2026), the opening paragraphs. ↩

  3. Global Foreign Exchange Committee, FX Global Code (December 2024 edition; provisional Japanese translation by the Tokyo Foreign Exchange Market Committee, in Japanese), glossary entry "settlement risk". ↩