Definition ∞ Foreign exchange settlement is the process of completing a foreign currency transaction by exchanging the principal amounts between involved parties. This involves the final transfer of funds in different currencies, typically occurring two business days after a trade is agreed upon, a period known as T+2. The process mitigates counterparty risk by ensuring that both sides of a currency exchange are completed simultaneously or very close in time. Efficient settlement is crucial for the stability and functioning of global financial markets.
Context ∞ The traditional foreign exchange settlement process faces challenges in speed and cost, making it a key area for innovation through distributed ledger technology (DLT) in crypto news. Central banks and financial institutions are exploring DLT-based solutions to achieve instantaneous or near-instantaneous settlement, reducing operational risks and capital requirements. The development of wholesale central bank digital currencies (CBDCs) could significantly transform foreign exchange settlement by enabling atomic swaps across national borders.
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