16. Furthermore, banks can incur FX settlement risk no matter which currency they buy or sell. For instance, even when - from one bank's point of view - the bought currency settles before the sold currency, a bank might face an earlier deadline for unilaterally cancelling its payment of the sold currency. In such circumstances, it could be forced to pay out the currency it sold even when it knows that it will fail to receive the currency it bought. Payment of sold currency

17. While payments can, theoretically, be made on value day up until the close of the local payments system (and sometimes even later through special arrangements), banks usually initiate the payment process well before that time. For a spot deal, the process typically begins on trade day, and in some cases immediately upon execution of the trade, when the back office starts verifying the details of the payment obligation with the back office of its counterparty, which is called the "confirmation procedure": which currency was sold, what amount, and when and where the counterparty should be paid. After the back office has established these details, the bank will issue a payment instruction to its correspondent bank. Most banks send payment instructions to their correspondent banks one to two days before value day. Banks cite improved efficiency, lower processing costs and the desire to avoid penalties for technical fails or other operational risks among the reasons for sending early payment instructions.

18. The ability to cancel payment instructions can depend on many factors. In many countries payments can be amended, cancelled or returned late on settlement day as long as the payer or its correspondent bank obtains the consent of the beneficiary, its correspondent bank or some other intermediary in the payment process. While such consent might easily be obtained in routine circumstances (e.g. to correct payment errors), it might not be granted at times of financial stress. Thus, from a settlement risk perspective, a bank would need to be aware of its explicit or implicit deadline for unilaterally cancelling its payment instructions. After such a deadline, the various intermediaries involved in executing a payment instruction might be able to cancel it on a "best efforts" basis; however, there is no guarantee that such efforts would be made or, if they were made, that they would be successful.

19. Some banks report that they can unilaterally cancel payment instructions for certain currencies on value day, and in some cases late on value day. Banks that report very late cancellation deadlines in a particular currency appear to act as their own paying agent in that currency or to use affiliated or unaffiliated correspondents that typically send payment instructions to the local payments system late in the processing day.

20. The majority of banks, however, report explicit or implicit cancellation deadlines of one to two days before value day (many correspondent banks indicate their willingness to try to cancel payment instructions after such deadlines, but they do not guarantee results). These restrictive deadlines reflect various combinations of the banks' and their correspondents' rules, practices and technological capabilities for processing payments.

21. For instance, in some cases these earlier deadlines reflect the fact that correspondent banks can send payment instructions to the local payments system one or more days before value day (e.g. in Japan, up to three days; in France, the Netherlands and Switzerland, one day). And, depending on local rules, laws and circumstances, these payment instructions may be processed or become irrevocable at that time.

22. Automatic straight-through processing conducted by a correspondent bank one to two days before value day may also make it very difficult, if not impossible, to cancel unexecuted payment instructions. In some cases correspondent banks can intervene manually to override their automated procedures and prevent processed but pending payment instructions from being sent to the local payments system. If, however, they are not able (or are not required) to do so, payment instructions become de facto irrevocable once they have been received by the correspondent - even if the correspondent does not actually send them to the local payments system until some later time.

23. If payment instructions become de facto irrevocable once they have been received by a bank's correspondent, then from the bank's perspective the unilateral cancellation deadline is the time when it commits itself to sending its payment instruction to its correspondent. Some banks have internal procedures that would permit them to hold back unissued payment instructions up until the time they are actually sent. The internal procedures of other banks, however, may be so automated (or cumbersome) that after some earlier point in the process it becomes virtually impossible for them to prevent a particular payment instruction from being issued. For such a bank, its unilateral payment cancellation deadline may be a time well before it actually issues its payment instruction.

24. The deadline for unilaterally cancelling payment instructions will also depend on how the payment is made (e.g. through a real-time gross settlement system, through a net settlement system or by a book-entry transfer on the accounts of a correspondent bank). The deadline can also be affected by the laws, rules and practices governing the relevant method of payment (operating hours, deadlines for sending and receiving messages, queuing arrangements, posting times, finality, etc.). In some currencies, correspondents may have one or more options for executing payment instructions, as well as the discretion to choose among those options. This may add a further element of uncertainty since each option may embody different cancellation rules.