Overcoming the barriers to using and expanding Payment-versus-Payment mechanisms in FX Settlement operations
PvP is a settlement mechanism that ensures that the final transfer of a payment in one currency occurs if and only if the final transfer of a payment in another currency takes place. PvP arrangements are primarily designed to reduce settlement risk in foreign exchange transactions.
2022 marks CLS’s 20th anniversary, and this milestone has led us to reflect on the reasons for its success over the years. We believe, and conversations with CLS’s key stakeholders confirm, that it is the public-private partnership approach which garners CLS widespread industry support while also ensuring it is aligned to relevant policy and regulation, legal frameworks and the consideration of local market practices.
Payment vs Payment (PvP) settlement is essential for the safe settlement of FX trades – ensuring that the transfer of assets is both secure and final. When settling in this manner a participant pays their currency, but it is delivered if, and only if, the final payment of the opposite currency is made by their counterparty.
CLSSettlement is the global standard in FX settlement risk mitigation. Please remind us about how it mitigates risk and some… You must be an e-Forex member in to view this content. To become a member click here.
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… You must be an e-Forex member in to view this content. To become a member click here.
