Supervisory guidance for managing risks associated with the settlement of foreign exchange transactions

February 2013

This document provides guidance to supervisors and banks on approaches for managing the risks associated with the settlement of foreign exchange (FX) transactions. It expands on, and replaces, the Basel Committee's Supervisory guidance for managing settlement risk in foreign exchange transactions published in 2000.

Since the original FX settlement risk guidance was published, the FX 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 activities.

The guidance provides a more comprehensive and detailed view on governance arrangements and the management of principal risk, replacement cost risk and all other FX settlement-related risks. In addition, it promotes the use of payment-versus-payment (PVP) 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. The key recommendations emphasise that a bank should:

An annex to the final guidance provides detailed explanation of FX settlement-related risks and how they arise.