CPMI Calls for Ideas on Expanding FX PvP Settlement
Posted by Colin Lambert. Last updated: October 10, 2021
Just over two years on from the Bank for International Settlements flagging increasing FX settlement risk in its Triennial Survey, momentum for change continues apace with the BIS’s Committee on Payments and Market Infrastructure (CPMI) is calling for ideas to help spread the use of PvP (payment versus payment) mechanisms.
Observing that settling FX trades can lead to significant principal risk exposures when one counterparty to a trade sends a currency payment to the other counterparty before receiving the currency it is buying, the CPMI stresses how the use of PvP mechanisms, which ensure that the final transfer of a payment in one currency occurs if and only if the final transfer of a payment in another currency or currencies takes place, can “significantly mitigate principal risk”.
The 2019 BIS Triennial FX survey indicated that FX settlement risk remains significant, identifying the proportion of total trades settled globally with PvP protection at below 40% of daily volume. “Expanding PvP settlement to a wider range of transactions would reduce FX settlement risk, support global financial stability and potentially help to lower the costs of cross-border payments that involve currency exchange,” CPMI notes.
As part of its G20 cross-border payments roadmap, the CPMI is developing proposals for increased PvP adoption by encouraging enhancements to existing arrangements and/or the design of new public and/or private sector solutions. As a starting point, it is inviting interested parties, including commercial banks, e-money operators and other fintech companies, to share their views on potential solutions.
Interested parties are asked to provide their thoughts on existing, planned or possible future solutions to expand PvP settlement to a wider range of transactions. Responses could address any of the following questions:
- How would the solution achieve PvP?
- What FX products and currency pairs would the solution be well-suited and/or designed to settle?
- Which aspects of the solution would incentivise and broaden user participation?
- What challenges faced by the market related to settling cross-border wholesale deliverable FX payments would the solution address and how would it do so (eg, geographical limitations and time-zone differences; liquidity availability; funding, operational and processing costs; access to payment systems; reconciliation and visibility of funds)?
- What roles can the public sector and private sectors play in the solution?
The deadline for submissions, which the CPMI says should be in English and ideally not more than 10 pages long, is Friday 12 November.