Central Bankers Call for More Action to Reduce FX Settlement Risk

Central bankers are calling for further action to reduce foreign exchange settlement risk, according to a survey by the Committee on Payment and Settlement Systems (CPSS). The report, ‘Progress in reducing foreign exchange settlement risk’, contains specific recommendations for individual institutions, industry groups and central banks to reduce and control remaining exposures that may still present systemic risk. These suggestions include: central banks should explore ways to work with banking supervisors and other regulators to ensure that financial institutions adequately control their foreign exchange settlement exposures on an ongoing basis; individual institutions need to ensure that the risk controls and incentives they have in place favour the use of risk-reducing FX settlement methods; and industry groups should continue to develop services for settling FX trades that will help to reduce remaining risks, particularly services for settling same day and certain next day trades. Timothy F Geithner, president of the Federal Reserve Bank of New York and CPSS chairman, said: “Recent market conditions emphasise how important it is that the settlement infrastructure supporting financial markets is robust and reliable, so that markets have the confidence to function normally even in adverse circumstances.”

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