Media Release Foreign Exchange Settlement Practices in Australia

The Reserve Bank today released the results of a survey of Foreign Exchange Settlement Practices in Australia.

The settlement of foreign exchange transactions involves particular risks because two currencies are delivered in different countries, often in different time zones and often through the use of agent (correspondent) banks. A credit risk arises for the bank delivering the currency which was sold in a foreign exchange transaction ahead of confirmation of receipt of the currency which was purchased. This exposure can last for days – from the time that instructions for delivery of the currency sold cannot be cancelled, until the time that receipt of the currency purchased is confirmed. Such exposures cannot readily be eliminated, but they can be reduced by improvements in banks' operating procedures.

Although the Australian foreign exchange market and the Australian dollar have significant roles in global foreign exchange trading, neither has been included in previous studies of foreign exchange settlement risk, such as those by the Bank for International Settlements and the New York Foreign Exchange Committee. The Reserve Bank's survey was conducted earlier this year and covered 24 authorised foreign exchange dealers, both bank and non-bank.

The survey confirmed that foreign exchange dealers in Australia face large risks as a result of the settlement process. Exposures lasting in excess of 24 hours are the norm and, for many currency pairs, the period of exposure is more than three business days. At any point in time, the settlement exposure of the Australian market represents a multiple of its capital base. These results are not out of line with findings for other foreign exchange markets.

The Bank is discussing the detailed findings of this survey with respondents. While several institutions are aware of their exposure to foreign exchange settlement risk and are working to reduce and better manage it, many are still struggling with the issue. The Bank will be looking for general improvement in management of foreign exchange settlement exposures and will undertake a further study of practices in 1998, to assess progress in this.

The Bank is also keen to ensure that the Australian dollar is included in arrangements currently being developed by the world's largest commercial banks which could eliminate much foreign exchange settlement risk.

A copy of Foreign Exchange Settlement Practices in Australia can be obtained from the Reserve Bank's Information Office, and is available on the Bank's web site.