In the foreign exchange market, currency is traded in pairs known as Transaction Currencies and Settlement Currencies. Each pair is defined by the first currency, known as the Transaction Currency, and the second currency, known as the Settlement Currency. Both currencies will be subject to the gains and losses incurred in a transaction. The process of selling one currency and buying another involves shorting the first currency and buying the settlement currency. To trade in a currency pair, the market must contain both currencies.
Settlement has evolved to address this complexity. However, today, technology has made settlement time as short as two business days. The settlement date is the date on which the transaction is final, when the buyer pays the seller and delivers the cleared assets to the buyer. The transaction date is referred to as the spot foreign exchange settlement, and is two business days after the execution date. Other types of settlement may also have a settlement date, including derivatives and life insurance benefits.
Trading in a foreign currency can involve large positions. To avoid significant financing and carrying costs, it is important to know how FX trades are settled. To keep up with these dates, check out the table below. The table is designed to help FX traders navigate this process. It is compiled by a third-party distributor and is not guaranteed to be accurate. While this table is an excellent tool for understanding how foreign currency trades are settled, it is not a replacement for proper FX training.
Foreign currency trade settlement involves the transfer of funds between two countries. The settlement process is facilitated by national payment systems. In the United States, the system is important as most global foreign exchange transactions are conducted in the US dollar. The bulk of CHIPS transactions are foreign exchange transactions. These systems are also crucial for forex trading. A common concern among foreign exchange traders is how to manage risk in the market. The current settlement methods expose trading banks to considerable risk. If they do not receive the money they owe on a trade, they may lose the funds they were expecting.
The settlement of foreign exchange transactions involves some unique risks. The two currencies are delivered in different time zones, and settlement timeframes can differ greatly. For example, the time difference between Australia and New Zealand is two hours. This means that foreign exchange settlement exposures from AUD/NZD transactions can last for a day. So, a large portion of the risk is removed by the recent efforts in foreign exchange markets. Despite the risks, the vast majority of forex traders consider settlement risk to be minimal.
In the spot market, currency pairs are traded. These pairs can include CAD/GBP and EUR/JPY. In each pair, one currency is known as the transaction currency and the other is known as the settlement currency. In a cross currency trade, the transaction currency and the settlement currency are different. This is a more advanced form of spot trading where the U.S. dollar is not involved. You can find information about how to set up a cross currency deal in FX Branch Parameters - CLS Preferences