Guy Debelle

The FX Global Code and settlement risk

September 2021 in Supplements

The FX Global Code is still relatively young. So how well does it address settlement risk as the FX market grows and changes? To find out we spoke to Guy Debelle, Deputy Governor of the Reserve Bank of Australia, Chair of the Global Foreign Exchange Committee and the Code’s author.

The GFXC’s June meeting spent some time discussing settlement risk. Although reiterating the importance of keeping settlement risk to a minimum would it be fair to say that the Committee seemed unclear as to its scope and extent?

That’s what we’re trying to establish. We’re working with CLS, which is analysing settlement data provided by its members and by means of our six-monthly FX surveys we’re aiming to get a better, more up-to-date picture of settlement risk in the global market. As far as the G10 currencies are concerned, what we do know is that internalisation of settlement by the major banks goes some way to explaining the extent of trades not settled through CLSSettlement. The GFXC and the Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI) are trying to get a handle on this. Among the emerging market currencies, turnover is increasing but some, such as China for example, have their own onshore settlement systems. So we still have some research to do on the quality the scale of global FX settlement risk.

Principles 35 and 50 of the FX Global Code make clear respectively that, “Market Participants should take prudent measures to manage and reduce their Settlement Risks” and that they “should measure and monitor their Settlement Risk and seek to mitigate that risk when possible.” Shouldn’t this be sufficient to ensure settlement risk is properly recognised and addressed?

I think it’s important that we remind people every once in a while, to pay attention to it because, particularly in the front office, it can be a bit “out of sight, out of mind.” Obviously it can be more front of mind for the back office.

Institutions who have signed up to the Code, should be and I think are, assessing how it should apply to all aspects of it of their business, which would include the settlement risk principles.  So, as I say, it’s just reminding people that settlement is an important part of the process because if there are issues with the settlement leg then that can be pretty problematic.

Some have suggested the Code needs to be strengthened as far as settlement risk is concerned, would you agree with them?

We are going to come up, at our next meeting, with some strengthening of some of that language. We’ve now discussed settlement risk at two GFXC meetings and also at various local foreign exchange committee meetings. For example, I was on a New York call a few weeks ago and it occupied a good deal of the discussion. Giving it that sort of visibility, has, I think, been helpful. I don’t think the sort of thing we’re going to propose is going to be that contentious, it’s just reminding people to pay attention to it.

Could you envisage a time when all currencies would be settled through CLS on payment versus payment basis?

The GFXC is solution agnostic, the solution doesn’t have to be CLS. That said, CLS is there, and handles a decently large chunk of the settlement flow. But if others have got technology solutions that work even for a small part of the market, then great, we encourage that. Any solution that reduces settlement risk is definitely to be encouraged.