GFXD Urges Greater Automation for FX Settlement Instructions

In the fourth of a series of reports looking at settlement risks in FX markets, the Global FX Division’s Operations Committee notes that while automated and authenticated channels are used in the communication of settlement instructions, there is room for further automation.

The report observes the population of instructions that are communicated via manual, unauthenticated channels, e.g. email (either during the onboarding of the relationship, or during subsequent changes of instructions), increases risk – both settlement and operational.

Equally, given the increasing sophistication of criminal actors, cyber fraud risk, the report says these risks impact both parties to the transaction, not just the liquidity provider. It adds, however, that risk management standards remain high and the resource required to perform exercises to mitigate risks created via manual, authenticated means can only increase over time.

With this in mind, the committee stresses it is supportive of further industry engagement to reduce such risks, and wants to promote automated, authenticated channels of exchange, and existing codes and standards, noting this helps deliver a significant reduction of risks within the FX ecosystem.

The report examines the detailed risks from continued use of manual processes, before highlighting the benefits of adherence to guidelines in the FX Global Code and the Standard published by the Financial Markets Standards Board (FMSB).

The GFXD’s Operations Committee says it is currently aware of at least five providers of authenticated settlement instruction services, and observes that Swift, as the main messaging technology used in the global FX markets, is also authenticated. It adds it is keen to emphasise the importance of the partnership between banks and their clients, and that managing and reducing the risks involved with using unauthenticated channels lies with both parties to the transaction.

“As such, we encourage readers of this paper to engage with the liquidity providers they are executing with to discuss the authenticated technology solutions available, supporting the Global FX Code and FMSB Standard,” it states, adding, “Given the significant risks seen with manual, unauthenticated channels we recommend market participants engage in dialogue with their FX providers to better understand the options available to reduce these risks, not least settlement, operational and fraud risk.”