BCBS and CPMI issued a letter encouraging bank supervisors and banks and other participants in the foreign-exchange (FX) market to follow the expectations set out in the 2013 BCBS supervisory guidance on managing FX settlement risk (BCBS guidance) and the Global FX Code (Principles 35 and 50). BCBS and CPMI welcome the plans of Global FX Committee to strengthen the guidance on FX settlement risk in its Global FX Code. BCBS and CPMI are also supportive of plans to collect data to monitor FX settlement risk on a regular basis. BCBS also published an update related to the assessment methodology and the additional loss absorbency requirement of global systemically important banks (G-SIBs).
With respect to the FX settlement risk, bank supervisors should incorporate the BCBS guidance into their supervisory framework and, as part of their ongoing supervisory activities, assess whether banks that are engaged materially in FX trading are meeting that guidance. Settling FX trades can lead to significant principal risk when one counterparty to a trade sends a currency payment to the other before receiving the currency it is buying. Principal risk and other associated risks are often underestimated because the length of time between trade execution and final settlement is not fully taken into account. The BCBS guidance recommends eliminating principal risk by using payment-versus-payment (PvP) settlement where practicable. For FX transactions that do not settle via PvP, the guidance recommends that supervisors encourage banks to minimize the size and duration of their principal risk and to conduct timely reconciliation of payments received. To fully address FX settlement-related risks, banks’ incentives, business practices, and infrastructures must be properly aligned.
Keywords: International, Banking, G-SIB, G-SIB Assessment, FX Settlement Risk, FX, Systemic Risk, BCBS, CPMI
Sam leads the quantitative research team within the CreditEdge™ research group. In this role, he develops novel risk and forecasting solutions for financial institutions while providing thought leadership on related trends in global financial markets.
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