Final guidance for managing risks associated with the settlement of foreign exchange transactions issued by the Basel Committee
15 February 2013
The Basel Committee on Banking Supervision issued today its guidance for managing risks associated with the settlement of foreign exchange transactions.
The guidance published today updates the Basel Committee's Supervisory guidance for managing settlement risk in foreign exchange transactions. Since the publication of that guidance in 2000, the foreign exchange market has made significant strides in reducing the risks associated with the settlement of FX transactions. Substantial FX settlement-related risks remain, however, not least because of the rapid growth in FX trading.
While the original 2000 guidance focused mainly on the principal risk element of FX settlement-related risks, the new guidance is intended to address a broader spectrum of FX settlement-related risks. It provides more comprehensive and detailed direction on governance arrangements and the management of principal risk as well as all other FX settlement-related risks. In addition, the guidance promotes the use of payment-versus-payment arrangements, where practicable, to reduce principal risk.
The guidance is organised into seven "guidelines" that address governance, principal risk, replacement cost risk, liquidity risk, operational risk, legal risk and capital for FX transactions.
Mr Stefan Ingves, Chairman of the Basel Committee on Banking Supervision and Governor of Sveriges Riksbank, noted that "The guidance will be an important step towards further improving banks' management of FX settlement-related risks, which is a potential cause of major financial disruptions." He added "the Committee encourages full adoption of this guidance by supervisors and their supervised banks, in particular internationally active banks, and intends to monitor and review banks' and supervisors' progress in applying this guidance."
It should be noted that this guidance was drawn up in close consultation with the Committee on Payment and Settlement Systems. It has also benefited from comments received on the consultative draft issued in August 2012. The Committee wishes to thank those who provided feedback and comments.