When a payment does not arrive, the receiving party immediately notifies the counterparty's operations or trading unit and updates its settlement risk exposure with the latest projected cash flows. The party that failed to pay on the scheduled date arranges for the correct value to be applied or pays compensation1.

Some institutions deduct fails from the limits set for each counterparty or review a series of fails to check whether the cause is more than a procedural problem (the 1999 examination manual of the US Federal Reserve Board)2.

The Japanese translation of the FX Global Code calls a settlement fail "shiharai furiko" (literally, failure to pay)1. In Japanese, the same word also names failure to pay, one of the credit events in a credit default swap (CDS), in which the reference entity does not pay its debt3. A settlement fail is a different thing.

Notes

  1. Global Foreign Exchange Committee, "グローバル外為行動規範" (FX Global Code, December 2024 version, provisional Japanese translation by the Tokyo Foreign Exchange Market Committee), Principle 55 (page 52) (in Japanese). ↩ ↩2

  2. Board of Governors of the Federal Reserve System, "Trading and Capital-Markets Activities Manual," Section 2021.1 "Counterparty Credit Risk and Settlement Risk" (March 1999), page 3, "Procedures." ↩

  3. Bank of Japan, "金融市場レポート" (Financial Markets Report, January 2010), "BOX3 ソブリン CDS 市場について" (Sovereign CDS market), page 17 (in Japanese). ↩