MAS Releases Report on Foreign Exchange Settlement Risk Practices
2 The report, entitled Foreign Exchange Settlement Risk Practices in Singapore, is the result of a survey of 39 banks in the Singapore foreign exchange market whose foreign exchange activities in total accounted for more than 90% of Singapore's total foreign exchange transactions in 1999. The report aims to assist local foreign exchange participants achieve a more comprehensive understanding of the relationship between their risk management practices and foreign exchange exposures in terms of magnitude and duration.
3 The survey revealed that interbank exposures arising from current foreign exchange settlement practices could be significant, lasting over two days. These findings are in line with the conclusions of earlier surveys conducted by the central banks of the G10 countries in 1996 and 1997. The MAS survey also indicated that a growing number of foreign exchange participants are increasingly aware of the issues surrounding FXSR and are now actively measuring, monitoring and enforcing limits against settlement risk.
4 According to the most recent Bank for International Settlements (BIS) Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity done in 1998, Singapore is the world's fourth largest foreign exchange trading centre and the Singapore dollar is among the top ten traded currencies in the world. "It is therefore essential that we have a proactive approach to understanding current local FXSR practices," said Mr Enoch Ch'ng, Senior Director of MAS' Market Infrastructure and Risk Advisory Department.
5 The survey was conducted as part of MAS' overall strategy to reduce FXSR in Singapore and is in line with similar international efforts. "We are pleased that the survey findings indicate that there is a growing awareness of FXSR amongst foreign exchange participants. The MAS will closely monitor the progress made by banks in reducing foreign exchange settlement risk," Mr Ch'ng said, adding that the MAS had already been actively involved in both local and international industry developments in this area.
6 MAS' effort in tackling FXSR includes the introduction of a real-time gross settlement system in Singapore in 1998 which has enabled participants to reduce their settlement risk in general. MAS is also working closely with the industry in preparation for Continuous Linked Settlement (CLS), a global clearing and settlement system that will significantly reduce settlement risk for foreign exchange trades.
7. The MAS report provides recommendations for reducing foreign exchange exposures and moving towards best practice standards. These recommendations include improving reconciliation practices, eliminating overly restrictive cancellation deadlines and enhancing bilateral netting between banks. MAS is also encouraging greater participation by banks' senior management in controlling foreign exchange risks.
8 Welcoming the recommendations included in the report, Ms Jeanette Wong, Chairperson of the Singapore Foreign Exchange Market Committee (SFEMC) and Senior Country officer of JP Morgan said, "Foreign exchange settlement risk remains one of the largest risks facing foreign exchange participants. While CLS will go a long way towards the reduction of foreign exchange settlement risk, the report will help significantly in increasing industry awareness and provides useful recommendations for reducing such risks."
1 The risk that one party to a foreign exchange transaction will pay the currency it sold but not receive the currency it bought is known as Foreign Exchange Settlement Risk (FXSR).
2 CLS will facilitate the simultaneous settlement of the buy and sell sides of a currency transaction to reduce settlement risks.