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
Featured Experts
Blake Coules
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
Previous Article
CNB to Allow Dividend Distribution Based on Individual AssessmentRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
