FX Global Code introduces changes to principles for reducing settlement risk

The Code will place greater importance on the use of PvP settlement mechanisms and promote the use of automated settlement netting systems.

By Joe Parsons

The Global Foreign Exchange Committee (GFEX) has introduced two new changes to its FX Global Code that aims to improve post-trade processing and settlement risk practices.

Following the changes, the Code will place greater importance on the use of payment-verses-payment (PvP) settlement mechanisms where available, and provide more detailed guidance on the management of settlement risk where PvP settlement is not use.

The changes will also promote the use of automated settlement netting systems, and place greater emphasis on the confirmation process of bilateral netting and the agreement of pre-determined cut-off points.

The changes follow a three-year review of the FX Global Code, undertaken by the GFEX, which aims to provide a set of best trading and post-trade practices for FX market participants.

A central part of the review was to address the potential significant risks associated with FX settlement risk. Automation and technology can be a way for a greater range of investment firms to benefit from best execution practices and minimise settlement risks, as highlighted in a recent webinar with FX market infrastructure CLS.

In late 2020, CLS established an industry working group to actively explore opportunities with the market to mitigate settlement risk further and unlock liquidity. With these changes to the Code, CLS is now looking to work with member firms to develop more accessible PvP and netting tools.

“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,” said Marc Bayle de Jessé, CEO of CLS.

“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. We look forward to updating the GFXC and its members on these initiatives in due course.”

CLSSettlement is the world’s largest multi-currency settlement system, utilising PvP and mitigating settlement risk by settling the payment instructions relating to underlying FX transactions simultaneously. The service settles over $5.5 trillion of payments in 18 of the most actively traded currencies globally for more than 70 direct participants and over 25,000 indirect participants.