IGTA Journal - Autum 2020

issues that can arise with this form of trading are adequately addressed in the Code’s principles. FX Settlement risk One aspect of the market that the GFXC has been focussing on its recent meetings is settlement risk . When conducting their triennial survey of the global FX market last year, the Bank for International Settlements expanded the scope of their survey to include data on settlement methods. The BIS data suggested that the amount of trades being settled without payment-versus-payment (PvP) protection remains very significant and has increased. There could be several reasons for this trend and further work is being done within the industry to understand the drivers. Part of the explanation is that the overall share of activity has increased in currencies that are not settled through CLS – the main means for obtaining PvP protection. In CLS currencies, it is possible that greater rates of internalisation by market-makers means that settlement risk is being mitigated without needing to use PvP services such as CLS. Many central banks conduct regular six-monthly surveys of activity in their markets – a slimmed- down version of the BIS triennial – and these central banks are enhancing their regular surveys to also capture data on settlement methods, so that we can better monitor what is going on. The importance of this issue – and the potential size of the risks involved – mean that settlement risk needs to remain a focus for the industry. Consistent with that, the GFXC concluded that it was appropriate to strengthen the Code’s guidance in this area. As part of the current review of the Code, we will be looking to further emphasise the need for market participants to sufficiently monitor and manage their settlement risks. This not only includes the credit risks associated with non-PvP settlement, but other elements of the settlement process as well. At its last meeting, the GFXC discussed the potential for ‘strategic fails’ in FX settlements, the incentives that can give rise to such fails and the adverse consequences for the broader market. Recent issues in the Turkish lira highlighted the importance of market participants making the maximum effort to complete their settlements to avoid exacerbating liquidity strains or otherwise disrupting the market. The guidance in the Code will also be strengthened to address this issue. Conclusion To conclude, the GFXC is aiming to complete the review of the FX Global Code by mid next year. Reflecting the feedback from market participants that it broadly remains fit for purpose, the changes to the Code will not be significant. Where appropriate they reflect the ongoing evolution of the FX market. Besides that, the GFXC continues to discuss the functioning of the FX market, including around benchmarks, with a particular focus on FX settlement risk. <www.globalfxc.org/agendas.htm> <www.globalfxc.org/press/p200326.htm> <www.globalfxc.org/docs/operational-challenges-facing-fx-industry-covid19.pdf> <www.globalfxc.org/case_studies.htm?m=71%7C438> See <www.bis.org/statistics/rpfx19.htm > and < www.bis.org/publ/qtrpdf/r_qt1912x.htm> . 5 1 2 3 4 5 4 / 4 BIS central bankers' speeches IGTA eJournal | Autumn 2020 | 10

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