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Settlement risk: BIS issues consultative report on settlement risk

With the fifth anniversary of the creation of the Continuous Linked Settlement Bank (CLS) fast approaching, the Bank for International Settlements committee on payment and settlement systems has issued a reminder to the market that further progress can still be made to reduce settlement risk.

BIS reports on settlement risk

In a consultative report, BIS says: "The central bank strategy to reduce systemic risk arising from settling foreign exchange trades has achieved significant success. However, a market-wide survey has identified areas where individual institutions, industry groups and central banks need to take further action to reduce and control remaining large and long-lasting exposures and to guard against a risk of reversing progress already made."

Risk reduction

BIS says that the major reduction in risk very much reflects the impact CLS has had since its creation. The industry-owned utility now settles 55% of FX market transactions. As of April 2006, 550 institutions were using CLS to settle trades in 15 currencies. But BIS has suggested that institutions should consider using bilateral netting to reduce exposures, provided that the necessary robust legal framework is in place. For industry groups such as CLS, BIS says that it "should continue to develop services for settling FX trades that contribute to the risk-reducing efforts of individual institutions. Particular emphasis should be placed on possibilities for settling same-day and certain-next-day trades, as well as trades involving additional currencies and counterparties."

Commenting on the report, Rob Close, chief executive of CLS Group, says that he supports BIS’s call for action.

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