CLSSettlement is the global standard in FX settlement risk mitigation. Please remind us about how it mitigates risk and some…
From serving retail and corporate businesses to maximising yield, the FX wholesale industry is fundamental to the functioning of global markets. However, it’s under growing pressure to reduce trade and post-trade costs. At the same time, the industry and regulators continue to seek to eliminate settlement and counterparty risks. Scrutiny from policy makers is growing, while international bodies like the G20 and FSB are ramping up the monitoring of FX risks.
Regulatory and industry focus in recent years has been on reducing FX settlement risk by broadening the adoption of payment versus payment (PvP) settlement mechanisms which is highlighted in the consultative report by the Bank for International Settlements (BIS) Committee on Payments and Market Infrastructures (CPMI)1 as part of the G20 cross-border payments roadmap.
Payment Vs Payment (PvP) prevents the transfer of currency between two entities unless both sides of the payment are liquid. The PvP settlement mechanism ensures that the final transfer of a payment in one currency takes place only if and when a payment in another currency takes place. A PvP arrangement reduces settlement risk in foreign exchange (FX) transactions and, depending on the design, can reduce funding costs by reducing participants’ liquidity obligations. Settlement risk is brought about when there is a loss for one party in a transaction when they are liquid, but the partnering bank involved in the transaction is not. This leads to central banks dealing predominantly in credit and not only increases the time settlements take, but also the risks. By implementing a PvP arrangement, no transaction will take place without both sides being liquid, therefore credit dealing is reduced, along with settlement risks.
Policy makers are paying closer attention to settlement risk – but an increasing share of FX transactions are settled without…
By Marc Bayle de Jessé, CEO, CLS The Bank for International Settlements’ (BIS) Quarterly Review published in December 2019 concluded that FX settlement risk is on the rise due to a significant portion of the global FX market being settled without protection. According to the BIS data, the volume of trades settled with PvP protection […]
As Global Head of Foreign Exchange Operations at Citi, with over 20 years of background at the bank, Leigh Meyer has an unrivalled perspective of FX operations. We asked him to comment on aspects of netting settlement risk. How would you describe the current state of settlement risk in the global FX market? For the […]
Payment versus payment (PvP) is the ideal solution for eradicating settlement risk but where this isn’t (yet) possible the market needs to consider all options and technologies. We spoke to Andrew Harvey, Managing Director Europe of the GFMAs Global FX Division. The Global Financial Markets Associations (GFMAs) Global Foreign Exchange Division (GFXD) was formed in […]
By Brian Charlick, Principal Consultant at CGI During the past decade we have witnessed a significant shift in the payments and banking landscape. A drive to mobile banking, fintechs, younger tech-savvy demographics and new global financial instruments have driven up payments volumes. This pattern of increased volumes has coincided with ever increasing demands for payments […]
By Richard Willsher SWIFT’s Global Payments Innovation (gpi) messaging has become the norm for cross-border interbank payments but the innovation continues. Launched in 2017 to offer a fast, transparent and secure cross-border payment platform, gpi provides customers with traceability of their payments. The service enables predictable settlement times, transparent bank fees and FX rates. The […]
