Value dates and settlement risk

When you agree an FX trade, the money doesn’t move at once. For most pairs it moves two working days later: trade on Monday, and the currencies change hands on Wednesday. That day is the value date, and this standard deal is called spot.

Only working days count, and a day must be open in both currencies’ countries. Trade on Thursday and spot is Monday. If that Monday is a UK bank holiday, GBP/USD spot moves to Tuesday.

USD/CAD settles after one working day, not two. And in pairs against the dollar, a US holiday on the day in between doesn’t delay spot; only a US holiday on the spot date itself does.

A trade for a later date is a forward, and its date is counted from spot, not from the trade: one month after a 15 June spot is 15 July. If that day is a weekend or a holiday, the trade moves to the next working day.

Two rules keep a forward in its month. If the next working day would fall in the following month, move back instead; this is called modified following. And if spot is the last working day of a month, the forward is the last working day of its month: the end-end rule.

Each currency is paid through its own country’s system, often hours apart. If you pay pounds in London in the morning and the other bank fails before paying your dollars in New York, you lose everything you paid. That is settlement risk, also called Herstatt risk after a German bank that failed this way in 1974.

The fix is to pay both sides together or not at all. CLS, a system banks set up in 2002, does this for the main currencies. Not every trade uses it: by value, just over a third of FX settlement in April 2025 went through such both-or-neither systems.

Before the settlement day there is a different risk. You buy £10m forward at 1.2500, and the bank fails when the same forward trades at 1.2800. A new deal costs £10m × 0.03 = $300,000 more: replacement risk. You lose only if the rate had moved your way. Losing because the rate moves, with no one failing, is plain market risk.