Banking Law and Cross-Currency Settlement Systems in Spain

Introduction

Cross-currency settlement occurs when parties exchange funds, securities or other financial instruments in different currencies. A Spanish bank may, for example, deliver euros while receiving US dollars, pounds sterling, Swiss francs, Japanese yen or another currency through a correspondent bank, a foreign-exchange platform or an international settlement system.

The principal danger is settlement risk: one party delivers one currency but does not receive the other. This is often called Herstatt risk. It can arise because currencies are settled in different time zones, through different payment systems, and under different legal rules.

Spain’s legal framework combines EU payment law, financial-market-infrastructure rules, banking supervision, settlement-finality protections and Spanish consumer-protection rules for foreign-currency products.

Core Infrastructure

For euro payments, Spanish banks use the Eurosystem’s T2 wholesale payment system. T2 replaced TARGET2 as the main platform for settling large-value euro payments in central-bank money. The Banco de España participates in the Eurosystem and supports Spanish access to this infrastructure.

For instant euro payments, institutions may use TIPS, the TARGET Instant Payment Settlement service. Securities transactions are generally settled through systems connected with TARGET2-Securities (T2S), while Spanish securities settlement involves Iberclear and the wider European settlement framework.

Cross-currency foreign-exchange transactions often depend on correspondent banks and international payment networks. Large institutions may use CLS, a specialised foreign-exchange settlement arrangement designed to reduce principal risk by settling both legs of an FX transaction on a payment-versus-payment basis.

A cross-currency payment is therefore usually not one single transaction. It is a chain involving the ordering bank, correspondent bank, receiving bank, payment-system operator, FX counterparty and possibly a clearing or settlement institution.

Legal Framework

The main legal sources include:

• the EU Settlement Finality Directive;
• Spain’s Law No. 41/1999 on payment and securities-settlement systems;
• the Payment Services Directive framework, implemented in Spain through Royal Decree-Law No. 19/2018;
• the Markets in Financial Instruments Directive (MiFID II);
• the European Market Infrastructure Regulation (EMIR);
• the Central Securities Depositories Regulation (CSDR);
• EU anti-money-laundering rules;
• Law No. 10/2014 on credit-institution supervision; and
• the Civil Code, Commercial Code and consumer-protection legislation.

Law No. 41/1999 is especially important because it protects the finality of transfer orders entered into designated payment and settlement systems. Once an order becomes irrevocable under the system’s rules, later insolvency of a participant should not normally unwind the completed transaction.

This legal certainty is vital. Without it, a foreign-exchange or securities-settlement system could face contagion if participants challenged payment instructions after a bank failure.

Payment-versus-Payment and Delivery-versus-Payment

The safest structure for cross-currency FX settlement is payment-versus-payment (PvP). Under PvP, the euro payment and the foreign-currency payment are released only when both sides are available for settlement.

For securities, the equivalent principle is delivery-versus-payment (DvP): the buyer receives securities only when payment is made. These mechanisms reduce the risk that one party performs while the other defaults.

If a Spanish bank settles an EUR/USD deal outside a PvP arrangement, it may be exposed between the time it pays euros and the time it receives dollars. The bank must measure this exposure, maintain liquidity, set counterparty limits and ensure that its correspondent-banking arrangements contain clear rules on cut-off times, cancellation, finality and recovery.

Foreign-Exchange Risk and Customer Protection

Cross-currency settlement also affects customers. A Spanish consumer may borrow in Swiss francs, take out a multi-currency mortgage, invest through a foreign-currency fund, or make a payment in a currency different from the account currency.

Banks must provide clear information about:

• the currency in which the obligation is denominated;
• exchange-rate methodology;
• conversion spread and charges;
• settlement date and value date;
• risk of exchange-rate movements;
• the possibility that the debt increases in euro terms;
• early-repayment or currency-switching conditions; and
• consequences of delayed or rejected cross-border payments.

A customer may understand that instalments are paid in euros but still not understand that the outstanding principal is linked to a foreign currency. Spanish and EU courts have repeatedly held that this risk must be explained in a transparent, comprehensible manner.

Supervisory and Operational Requirements

The Banco de España supervises Spanish credit institutions’ payment operations, liquidity management and risk controls. The ECB supervises significant banks under the Single Supervisory Mechanism. The CNMV may also become relevant where the transaction involves derivatives, investment services, securities settlement or market infrastructure.

Banks should maintain:

• real-time exposure monitoring;
• correspondent-bank due diligence;
• foreign-exchange settlement limits;
• liquidity buffers in relevant currencies;
• robust cut-off-time controls;
• confirmation and reconciliation procedures;
• business-continuity arrangements;
• sanctions and AML screening; and
• documented procedures for rejected, delayed or duplicated payments.

The use of a foreign cloud provider or overseas payment processor also creates outsourcing and operational-resilience risks. Under DORA, banks must manage ICT third-party risk and ensure that critical payment and settlement functions remain resilient.

Insolvency and Conflict of Laws

When a cross-currency transaction involves an insolvent bank, the governing law of the settlement system usually determines the finality of transfer orders, netting and collateral. This avoids a situation in which each participating country applies different insolvency rules to the same payment.

However, the legal position may differ for the underlying customer contract, FX derivative, collateral agreement or securities account. These instruments should therefore clearly identify their governing law, jurisdiction, collateral location and close-out-netting provisions.

Important Case Laws

1. Andriciuc and Others v Banca Românească SA, C-186/16 (2017)
   The Court of Justice held that foreign-currency loan clauses must be transparent. Consumers must understand the serious economic consequences of exchange-rate changes.
2. Kásler and Káslerné Rábai v OTP Jelzálogbank, C-26/13 (2014)
   The Court held that core contractual terms may be reviewed for unfairness where they are not drafted in plain and intelligible language. This is relevant to currency-conversion and exchange-spread clauses.
3. OTP Bank and OTP Faktoring v Ilyés and Kiss, C-51/17 (2018)
   The Court examined foreign-currency loan terms and emphasised that consumers must receive sufficient information to assess currency risk before entering the agreement.
4. Dunai v ERSTE Bank Hungary, C-118/17 (2019)
   The Court considered the effect of unfair foreign-currency clauses and national legislation replacing such terms. It confirms strong consumer protection where FX clauses distort the contractual balance.
5. DenizBank AG v Verein für Konsumenteninformation, C-287/19 (2021)
   The Court considered payment-service terms, including changes to framework contracts and security issues. The decision is relevant to the transparency and contractual governance of payment arrangements.
6. Spanish Supreme Court, STS 608/2017, 15 November 2017
   The Supreme Court treated a multi-currency mortgage as a complex financial product because exchange-rate movements can increase the outstanding debt. It required a high level of transparency concerning currency risk.

Conclusion

Cross-currency settlement in Spain depends on secure financial-market infrastructure, legal finality, prudent liquidity management and transparent customer disclosure. Systems such as T2, T2S and PvP arrangements reduce settlement risk, but they do not eliminate operational, credit, FX, cyber, sanctions or insolvency risk.

Spanish banks must ensure that both institutional settlement arrangements and customer-facing foreign-currency products are legally robust, operationally resilient and clearly explained.