BCBS-CPMI Issue Letter on Supervisory Guidance for FX Settlement Risk
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.
Related Links
Keywords: International, Banking, G-SIB, G-SIB Assessment, FX Settlement Risk, FX, Systemic Risk, BCBS, CPMI
Previous Article
CNB to Allow Dividend Distribution Based on Individual AssessmentRelated Articles
HKMA Finalizes Policy Modules on Group-Wide Approach and Remuneration
The Hong Kong Monetary Authority (HKMA) revised the Supervisory Policy Manual module CG-5 that sets out guidelines on a sound remuneration system for authorized institutions.
EBA Guide to Monitor Threshold for Intermediate Parent Undertakings
The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).
PRA Finalizes Approach to Supervision of International Banks
In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.
FCA Issues PS21/9 on Implementation of Investment Firms Regime
The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.
EBA Proposes Regulatory Standards to Identify Shadow Banking Entities
The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.
IOSCO Proposes Recommendations on ESG Ratings and Data Providers
The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.
ESMA Group Issues Recommendations on RFR Switch in Interdealer Market
The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.
ECB Study Assesses Impact of Basel III Finalization Package
The European Central Bank (ECB) published a paper as well as an article in the July Macroprudential Bulletin, both of which offer insights on the assessment of the impact of Basel III finalization package on the euro area.
ISDA Finds FRTB Results in Higher Capital Charges for Carbon Trading
The International Swaps and Derivatives Association (ISDA) published a paper that explores the impact of the Fundamental Review of the Trading Book (FRTB) on the trading of carbon certificates.
PRA Updates Remuneration Policy Statement Templates and Tables
The Prudential Regulation Authority (PRA) published the remuneration policy self-assessment templates and tables on strengthening accountability.
