Settlement risk - what to tackle and how? - panel discussion with Keith Tippell

The panel discussion on "Settlement Risk - What to Tackle and How?" featured experts from various sectors of the financial industry, including Keith Tippell from CLS, Marianne from Ninth Gear, Hampton Finer from the New York Fed, and Jerome Kemp from Baton Systems. The conversation centered around FX settlement risk, its implications, and potential solutions.

Main Financial Strategies and Trends:

• Understanding Settlement Risk:
  • Settlement risk is the risk that one party in an FX transaction pays the sold currency without receiving the counter currency.
  • The size of the FX market amplifies the potential impact of settlement failures, with approximately $18.7 trillion in FX payment obligations daily.
• Payment versus Payment (PVP):
  • PVP is a mechanism ensuring simultaneous transfer of payments in both currencies, thus mitigating settlement risk.
  • The importance of a robust rulebook and regulatory oversight to support PVP mechanisms was emphasized.
• Current Exposure to Settlement Risk:
  • Despite efforts to mitigate risk, an estimated $8.9 trillion of FX payments remain exposed to settlement risk.
  • The proportion of trades with PVP protection has decreased from 50% in 2013 to 40% in 2019.
• Technological Innovations:
  • The panel discussed how distributed ledger technology (DLT) and other innovations could eliminate settlement risk and enhance transparency.
  • Ninth Gear's approach focuses on atomic transactions and a single source of truth to eliminate reconciliation errors.
• Central Bank Digital Currencies (CBDCs):
  • The role of CBDCs and stablecoins in enhancing PVP settlements was explored, with an acknowledgment that these technologies are still in development.
• Regulatory Collaboration:
  • Ongoing efforts from the CPMI and other regulatory bodies aim to expand PVP mechanisms and improve the overall safety and efficiency of cross-border payments.

Methodologies and Recommendations:

• Step-by-Step Guide for Mitigating Settlement Risk:
  • Implement PVP mechanisms wherever possible.
  • Utilize netting processes for transactions that cannot be settled via PVP.
  • Foster collaboration between public and private sectors to expand PVP to more currencies.
  • Leverage technology to enhance liquidity management and optimize settlement cycles.

Presenters:

• Victoria Cummings (Moderator)
• Keith Tippell (CLS)
• Marianne (Ninth Gear)
• Hampton Finer (New York Fed)
• Jerome Kemp (Baton Systems)