Survey of foreign exchange settlement risk
1 February 2006
The Committee on Payment and Settlement Systems will carry out a survey of how banks and other selected institutions manage the risks they can incur when settling foreign exchange transactions. The survey will take place during the second quarter of this year. More than 100 institutions active in the foreign exchange market will be invited to take part and the CPSS strongly encourages their participation.
In 1996 the G10 central banks endorsed a comprehensive strategy to reduce the systemic risks inherent in the arrangements being used to settle foreign exchange transactions. The strategy, which was set out in Settlement risk in foreign exchange transactions, involved three tracks: action by individual banks to control their settlement exposures, action by industry groups to provide risk-reducing multicurrency services, and action by central banks to induce private-sector progress. The G10 central banks reaffirmed this strategy in 2000, emphasising the prime responsibility of the private sector for risk reduction.
Since 1996, the CPSS has been monitoring progress in implementing the strategy, including the launch in 2002 of CLS Bank. The Committee has decided that now is an appropriate time to assess in more detail the extent to which the objectives of the strategy have been achieved and whether or not there may be a need for further action.
The current survey is based on those carried out in 1996 and 1997, the results of which were reported in Reducing foreign exchange settlement risk: a progress report. The current survey has been updated to reflect the significant developments in settlement practices that have since taken place.
Notes to editors
- The survey is being carried out under the auspices of the Committee on Payment and Settlement Systems (CPSS), which serves as a forum for central banks to monitor and analyse developments in payment and settlement arrangements and to consider related policy issues. The chairman of the CPSS is Timothy F Geithner, President of the Federal Reserve Bank of New York. The survey is being coordinated by the CPSS Sub-Group on Foreign Exchange Settlement Risk. The chairman of the sub-group is Lawrence M Sweet, Vice President of the Federal Reserve Bank of New York. The CPSS secretariat is hosted by the BIS. More information about the CPSS, and all its publications, can be found on the BIS website.
- Foreign exchange settlement risk is the risk that one party to an FX trade pays out the currency it sold but does not receive the currency it bought. It consists of both liquidity risk (the risk that the purchased currency is not received when due) and credit risk (the risk that the purchased currency is not received when due or at any time thereafter). In this situation, a party's foreign exchange settlement exposure equals the full amount of the purchased currency. For more information about foreign exchange settlement risk and how it arises, see Settlement risk in foreign exchange transactions.
- CLS Bank provides a means of settling foreign exchange transactions in 15 currencies on a "payment versus payment" basis. CLS Bank is owned by private-sector banking and other financial institutions. For more information go to http://www.cls-services.com/.