Basel Committee Issues Final Guidance for Managing FX Transaction Risks

The Basel Committee on Banking Supervision (BCBS) has issued its final guidance for managing risks associated with the settlement of foreign exchange (FX) transactions, an update of its guide issued in 2000 for managing settlement risk in FX transactions. A consultative draft of the new guide was issued last August.

The BCBS said that in the interim 13 years the FX market has made significant strides in reducing the risks associated with the settlement of FX transactions. Substantial FX settlement-related risks remain, however, not least because of the rapid growth in FX trading.

While the original 2000 guidance focused mainly on the principal risk element of FX settlement-related risks, the new guidance is intended to address a broader spectrum of FX settlement-related risks. It provides more comprehensive and detailed direction on governance arrangements and the management of principal risk as well as all other FX settlement-related risks. In addition, the guidance promotes the use of payment-versus-payment arrangements, where practicable, to reduce principal risk.

The guidance is organised into seven ‘guidelines’ that address governance, principal risk, replacement cost risk, liquidity risk, operational risk, legal risk and capital for FX transactions.

“The guidance will be an important step towards further improving banks’ management of FX settlement-related risks, which is a potential cause of major financial disruptions,” said Stefan Ingves, BCBS chairman and governor of Sveriges Riksbank. “The Committee encourages full adoption of this guidance by supervisors and their supervised banks, in particular internationally active banks, and intends to monitor and review banks’ and supervisors’ progress in applying this guidance.”

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