GFXC Updates FX Global Code to Promote PvP Settlement

The changes place greater importance on the use of PvP settlement where available, and provide guidance on risk reduction where PvP settlement is not in use.

The GFXC (Global Foreign Exchange Committee) has introduced changes to its FX Global Code that aim to improve post-trade processing and reduce settlement risk.

When the Code was launched in 2017, the GFXC committed to undertaking a review of the Code every three years to ensure that its guidance remains appropriate and is contributing to an effectively functioning market. However, the Covid-19 delayed its work early last year.

Last October, Guy Debelle, deputy governor of the RBA (Reserve Bank of Australia) and chair of the GFXC, said a key issue has been to address settlement risk in the FX market, given the increasing number of trades being settled without PvP protection.

“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,” Debelle said at the time.

Last October, in an article for Regulation Asia, CLS Head of Client Management for APAC Margaret Law warned that about half of the global FX market was exposed to settlement risk, saying immediate action was needed to avoid introducing vulnerabilities into the global financial system.

The changes to the Code place greater importance on the use of PvP settlement mechanisms where available, and provide more detailed guidance on the management of settlement risk where PvP settlement is not in use.

The specific changes to the Code concerning the mitigation of FX settlement risk and best practices in post-trade processing are:

  • Principle 35: strengthening the importance of PvP settlement to mitigate settlement risk where possible and the use of automated settlement netting systems where it is not.
  • Principle 50: more detailed guidance on the measurement, monitoring and control of settlement risk where PvP settlement is not available, with a greater emphasis on the confirmation process of bilateral netting and the agreement of predetermined cut-off points.

CLS’s FX settlement service, known as CLSSettlement, went live in September 2002 with the support of the central banking community, offering simultaneous PvP exchange on each of the two legs of an FX transaction to mitigate settlement risk.

CLS has recently announced that it has completed a significant phase of its multi-year technology investment programme known as Convergence, enabling it to deliver a more sophisticated, resilient, scalable and flexible post-trade technology platform by migrating CLSSettlement onto its Unified Services Platform (USP).

For currencies unable to settle in CLSSettlement, a standardised, automated bilateral netting service for FX trades known as CLSNet is available – allowing trades in about 120 currencies to be validated and matched up to the predetermined cut-off times between counterparties for each currency.

This ensures only confirmed trades are included in the automated net calculation and that there is a single common record of the net payment obligations. By automating the netting process via a centralised infrastructure, users of non-CLSSeettlement currencies benefit from greater operational efficiency and increased risk mitigation.

In a statement, CLS chief executive Marc Bayle de Jessé welcomed the changes to the Code, saying it will encourage FX market participants to explore ways to mitigate risk further and reduce operational costs by adopting a best practice approach to FX settlement risk management and netting.

“In support of these changes to the Code, and in order to make access to PvP settlement mechanisms more widely available, we are working with the market to evaluate potential PvP solutions for currencies that are currently unable to settle in CLSSettlement.”

In late 2020, CLS established an industry working group and has since been actively exploring opportunities with the market to mitigate settlement risk further and unlock liquidity.

“We are also analysing trade data from our settlement members to contribute to the design of any new solution and further the industry’s understanding of market participants’ settlement practices,” de Jessé said.

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