16 May 2008

CPSS: More needs to be done to reduce foreign exchange settlement risk

The CPSS has called on individual institutions to ensure risk controls and incentives that are in place are compatible with settlement services. Industry groups should continue to develop services for settling FX trades that will reduce risks. 

The BIS has called on individual institutions to ensure risk controls and incentives that are in place are compatible with settlement services. Industry groups should continue to develop services for settling FX trades that will reduce risks, particularly services for settling same day and certain next day trades.

 

Central bankers recommend reducing and controlling remaining exposures that may still present systemic risk and will explore ways to work with banking supervisors and other regulators to ensure that financial institutions adequately control their foreign exchange settlement exposures on an ongoing basis.

 

The report recommends action by individual institutions, industry groups and central banks. Individual institutions need to ensure that the risk controls and incentives they have in place favour the use of risk-reducing FX settlement methods. Industry groups should continue to develop services for settling FX trades that will help to reduce remaining risks, particularly services for settling same day and certain next day trades. Central banks will work with supervisors to encourage continued progress by the financial industry.

 

The BIS also recommends that central banks work more closely with banking and non-bank regulators to support improvements in local payments law and the operations of large-value payment systems and to encourage appropriate risk management procedures for FX settlement exposures.

 

Key recommendations include:

Individual institutions should control remaining exposures appropriately by reducing large and long-lasting exposures, and shortening the duration of settlement exposures.

 

All institutions should take immediate steps to avoid underestimating the risk they incur both intraday and overnight, and should maintain or establish clear senior-level responsibility and authority for managing exposures. Institution-wide business policies should be based on fully informed and appropriate choices among available settlement methods.

 

Providers of PVP settlement services, such as CLS and other existing or prospective industry groups, should continue to develop services for settling FX trades that contribute to the risk-reducing efforts of individual institutions. Particular emphasis should be placed on possibilities for settling same day and certain next day trades, as well as trades involving additional currencies and counterparties. Foreign exchange committees and other industry groups should encourage further progress.

 

Action by central banks:

- Central banks will consult with the industry to establish whether changes to the large-value payment systems they operate are necessary and desirable.

- Work with banking supervisors to explore options that could ensure on an ongoing basis that banks apply appropriate risk management procedures to their FX settlement exposures.

- Work with regulators of non-bank financial institutions that have existing or potentially significant FX settlement exposures to explore options similar to those of the banking supervisors.

- Continue to oversee FX settlement service providers such as CLS in order to assess their compliance with relevant international standards, particularly as they seek to introduce new services.

- Continue to monitor developments regarding the availability and use of different FX settlement methods, and the risk of backsliding, given their potential implications for global financial system stability.

 

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