Supervisory Guidance Managing Risks (cf Guideline 6)

Since the previous supervisory guidance was published in 2000, the foreign exchange (FX) market has made significant strides in reducing the risks associated with the settlement of FX transactions. These risks include principal risk, replacement cost risk, liquidity risk, operational risk and legal risk. Such FX settlement-related risks have been mitigated by the implementation of payment-versus-payment (PVP) arrangements and the increasing use of close-out netting and collateralisation. However, substantial FX settlement-related risks remain due to rapid growth in FX trading activities. In addition, many banks underestimate their principal risk and other associated risks by not taking into full account the duration of exposure between trade execution and final settlement. While such risks may have a relatively low impact during normal market conditions, they may create disproportionately larger concerns during times of market stress.