FX/OTC Volumes and Settlement Components
Published: 2024-07-06 05:02:17

Every three years, the Swiss National Bank conducts a survey on the turnover1 in the foreign exchange and over﻿-the﻿-counter derivatives markets in Switzerland. This survey is coordinated worldwide by the Bank for International Settlements (BIS).

In April 2022, the 30 reporting banks recorded turnover in foreign exchange and derivatives transactions of **USD 367 billion per trading day.** Foreign exchange transactions accounted for USD 350 billion (95%) of this total, and interest rate derivatives transactions for USD 18 billion (5%).
[Swiss National Bank Report](https://data.snb.ch/en/topics/ziredev/doc/ddum_2022)

FX/OTC is huge value, but very low margin business, which is core for the functioning of the Banks, Markets and Country in General


Below are the 10 steps involved in FX/OTC settlement business

**1. Trade Capture**

Trade Execution: The initiation of a trade in the FX or OTC derivatives market, where two parties agree on the terms of the transaction.
Trade Recording: The details of the executed trade are captured in the trading system. This includes information such as the type of instrument, trade date, value date, counterparties, notional amount, and agreed price.

**2. Trade Validation**

Confirmation Matching: Both parties to the trade send confirmations of the trade details to each other. These confirmations are matched to ensure both parties agree on the trade details.
Trade Validation: Internal validation processes ensure that the trade details are correct and conform to the organization's policies and regulatory requirements.

**3. Settlement Instructions**

Instruction Generation: Based on the trade details, settlement instructions are generated. These instructions detail the accounts and the amounts to be settled.
Instruction Transmission: Settlement instructions are sent to the appropriate clearing or settlement systems. In FX markets, this might involve sending instructions to an FX settlement system like CLS (Continuous Linked Settlement).

**4. Reconciliation**

Internal Reconciliation: Comparing internal records of trades and settlements to ensure consistency.
External Reconciliation: Comparing internal records with external records from counterparties, custodians, or settlement systems to identify and resolve discrepancies.

**5. Settlement**

Payment Processing: The actual transfer of funds or assets between parties. In FX settlements, this often involves the simultaneous exchange of different currencies.
Delivery vs. Payment (DVP): In the case of securities, ensuring that the delivery of the security and the payment occur simultaneously to mitigate settlement risk.

**6. Risk Management**

Exposure Management: Monitoring and managing the financial exposure resulting from open FX and derivatives positions.
Collateral Management: Managing the collateral posted against derivatives positions to mitigate counterparty risk.

**7. Reporting**

Regulatory Reporting: Providing required reports to regulatory bodies, which may include transaction details, valuations, and risk metrics.
Internal Reporting: Generating reports for internal stakeholders, including risk management, finance, and compliance teams.

**8. Post-Settlement Processing**

Accounting: Recording the settled trades in the accounting systems.
Dispute Resolution: Handling and resolving any disputes or discrepancies that arise from the settlement process.

**9. Technology and Infrastructure**

System Integration: Ensuring that trading, risk management, and settlement systems are properly integrated to facilitate smooth processing.
Data Management: Managing the data required for the entire settlement process, ensuring accuracy and integrity.

**10. Continuous Improvement**

Process Review: Regularly reviewing and improving settlement processes to enhance efficiency, reduce risk, and comply with evolving regulatory requirements.
Automation: Implementing automated solutions to reduce manual intervention and errors in the settlement process.