In a report published today by the Committee on Payment and Settlement Systems, central bankers highlight the need for further action to reduce foreign exchange settlement risk.

The report presents the results of a major survey of how over 100 banks and other institutions active in the FX market manage the risks that can arise when settling foreign exchange transactions. It also contains specific recommendations for individual institutions, industry groups and central banks to reduce and control remaining exposures that may still present systemic risk.

It suggests that institutions need to ensure that the risk controls and incentives they have in place favour the use of risk-reducing FX settlement methods; that industry groups should continue to develop services for settling FX trades that will help to reduce remaining risks, particularly services for settling same day and certain next day trades; and, central banks should work with supervisors to encourage continued progress by the financial industry.

“The financial services industry has made significant progress in dealing with foreign exchange settlement risk. However, more can and should be done to tackle remaining exposures and to guard against the risk of reversing the progress that has already been achieved,” said Timothy Geithner, president of the Federal Reserve Bank of New York and CPSS chairman.

Nout Wellink, president of the Netherlands Bank and chairman of the Basel Committee on Banking Supervision, said, “The Basel Committee welcomes this important report, and we have begun to discuss how best to work with the CPSS to encourage further progress.”