DEEP LOOK | As Asian markets confront accelerated settlement cycles, FX settlement risk has become a critical pressure point given timezone asymmetry with the West. But on the ground in Hong Kong, China and Japan, the tide is turning. This case study shows how banks are managing FX risk in real time using new PvP tools, and how IM reduction and compression are helping Japan deleverage after 15 years of swollen notionals. As OSTTRA’s Yutaka Imanishi explains, these trends are converging to reshape how risk moves through APAC markets and their global counterparties.
Part 1: Faster, safer FX — Tackling CNH–USD flows
In a volatile Chinese offshore yuan–US dollar (CNH–USD) environment, FX settlement risk is keeping many APAC operations heads awake at night – sometimes literally. Few feel that pressure more acutely than the teams at HSBC, whose Hong Kong trading desk executes CNH–USD flows that must settle within unforgiving windows. Yet the industry’s primary payment‑versus‑payment (PvP) mechanism is increasingly falling short of what these desks need.
CLS, the long‑standing PvP settlement system, has been the industry’s main defence against Herstatt risk — the danger that one party pays out its currency but never receives the counter‑currency because the counterparty fails in the interim. While CLS is central‑bank‑backed and systemically important, its architecture reflects the era in which it was built. It supports only a fixed set of major currencies, operates within narrow settlement windows, and requires participants to pre‑fund hours before receiving the counter‑currency. For APAC banks dealing with emerging‑market currencies and timezone asymmetry, the model was gradually showing its limitations.
Why Asia needed more
CLS operates as a centralised hub. It holds accounts at major central banks — the Bank of Japan, the Federal Reserve, the Bank of England and others — and member banks hold accounts at CLS. When two banks settle a trade through CLS, each must “pay in” its currency to CLS’s central‑bank account by a fixed deadline, typically between 7am and noon New York time. Only once both sides have paid in does CLS release the corresponding “pay out.”
This eliminates Herstatt risk, but introduces friction of its own. Banks must pre‑fund their pay‑in hours before receiving the counter‑currency. Settlement only occurs within the five‑hour CLS window. Emerging‑market currencies like CNH are not supported. And liquidity is tied up until CLS completes the cycle.
As Yutaka Imanishi, head of APAC at post‑trade network OSTTRA, puts it: “CLS is safe, but rigid. It works for major currencies, but emerging currencies and regional flows need something more flexible.”
Banks therefore developed workarounds. For years, CLS members used “in/out swaps” — offsetting trades that reduce the principal amount settled inside CLS, while settling the remainder outside CLS bilaterally. These arrangements relied on trust between large, well‑rated institutions, but they still carried timing and liquidity risks. APAC banks needed something safer, faster and more adaptable.
The breakthrough: PvP settlement orchestration
That breakthrough came when HSBC and Wells Fargo began using OSTTRA and Baton Systems’ DLT‑powered PvP network. Instead of a centralised hub, each bank connects bilaterally through nodes operating under a shared rulebook. Baton’s distributed ledger technology matches trades and establishes a single golden record. Currencies are continuously netted. Each side funds its settlement account. And once both payments are confirmed, settlement is instantaneous. If the counter‑payment doesn’t arrive within minutes, funds are automatically returned — eliminating the window for settlement risk.
Imanishi describes it succinctly: “In this PvP network, once the pay‑in and pay‑out are matched, settlement happens instantly. If it doesn’t match within minutes, the funds are refunded. It’s safe, dynamic and atomic.”
This is true T+0 settlement — not just for major currencies, but for emerging ones too.
Case study: HSBC and Wells Fargo settle CNH–USD on DLT
HSBC faced a familiar problem in CNH–USD flows. CNH is not a CLS currency. Bilateral settlement exposed them to Herstatt risk. Daily credit limits on CNH constrained trading. And as the market veers toward T+0, waiting hours for settlement was no longer viable.
Using OSTTRA/Baton PvP, HSBC executed its first CNH–USD settlement with Wells Fargo. The trade settled within minutes. There was no CLS window to navigate, no pre‑funding delay, no Herstatt risk, no CNH credit‑line constraints and no exposure to timezone gaps.
Imanishi observes: “This makes T+0 possible for currency settlement — not just for the 18 CLS currencies, but for emerging currencies too.”
Two banks are already live and the model is now being extended to support flows that would not be eligible for CLS, enabling trillions in daily flows to be settled outside the CLS window. This is becoming a new foundation for accelerated settlement in APAC.
Part 2 — Japan’s deleveraging: A parallel shift in risk reduction
While APAC banks tackle FX settlement risk, Japan is undergoing its own structural shift — one that complements the region’s move toward safer, more efficient post‑trade. But this story is not about faster settlement. OTC derivatives in Japan already settle on T+1. Japan’s transformation is about something else entirely: reducing leverage after 15 years of swollen swap books.
Since 2008: Notionals grew unchecked
Ultra‑low rates meant banks could hold large swap books cheaply. Hedging demand stayed stable. Clearing mandates pushed more trades into CCPs. Compression adoption lagged. International dealers kept their positions lean; Japanese banks, flush with capital, were less concerned.
The result was structural leverage — and because Japan is globally interconnected, Western banks felt it too. “When Japanese banks carry high notionals, other participants feel that. It affects pricing and counterparty behaviour,” Imanishi notes.
The LIBOR shock slowed everything down
When yen LIBOR was discontinued, Japanese banks had to rebuild systems for OIS. “They became quieter in compression exercises,” Imanishi recalls. “It took time.”
Notionals stayed high. The backlog grew.
2024/25: Rising rates trigger a historic reset
Then came the turning point. Yen rates rose. Volatility surged. JSCC clearing volumes hit ¥4,100 trillion. Banks accumulated new hedges. Capital charges increased. Suddenly, reducing gross notional mattered.
In October 2025, OSTTRA’s yen compression cycle removed ¥800 trillion — the largest ever. December added ¥530 trillion. Across the year, more than ¥4,100 trillion was compressed Participation surged. Trade revision and refactoring boosted reductions by 30%. The network effect lifted all participants by 17%. And CCPs benefited too.
“Clearing houses want to reduce outstanding notionals because of system burden. We help them do that.”
Today: Japan enters a new phase of active deleveraging
After 15 years of accumulation, Japan is finally reducing leverage at scale. And here is where the two stories — FX settlement and IRS deleveraging — converge. Compression reduces exposures. IM reduction lowers funding costs and counterparty risk. PvP orchestration eliminates settlement risk. Tools such as these are reshaping how risk moves through APAC markets.
