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Guidelines for Foreign Exchange Settlement Netting

The Foreign Exchange Committee

February 6, 1997

Dear Foreign Exchange Professional:

The Foreign Exchange Committee's (Committee) Guidelines for Foreign Exchange Settlement Netting is available as a PDF file. (This document is viewable only in Adobe Acrobat Reader.) This paper is the result of the Committee's most recent endeavor in an ongoing commitment to help foreign exchange market participants reduce settlement risk. The Committee's netting work began with its October 1994 paper, Reducing Foreign Exchange Settlement Risk. That paper demonstrated that the bilateral netting of payments due between foreign exchange counterparties could significantly reduce foreign exchange settlement risk.

In response to your follow-up requests for information on how individual firms should approach the settlement netting process and the Committee's 1995 survey of its members' current netting practices, the Committee realized there is a very real need for a "how to" guide for implementing settlement or payment netting arrangements. The Guidelines for Foreign Exchange Settlement Netting is just such a guide. Any analysis requires, among other things, a clear understanding of: the quantifiable and unquantifiable benefits; the increasing importance that regulatory authorities are placing on the need to reduce foreign exchange settlement risk; and finally, the related direct and indirect expense issues. Generally, a firm must analyze the composition of its foreign exchange business and then determine which of the several approaches to settlement or payment netting is best. The Committee would like to reinforce the view that the netting of foreign exchange payments is one of most effective ways to reduce foreign exchange settlement risk.

The Committee's Document of Organization and a list of its 1997 membership is included within the PDF file. Do not hesitate to contact me or other members of the Committee with questions or comments regarding the Committee's Work.

Sincerely yours,

John Finigan

Quick Links
Guidelines for Foreign Exchange Trading Activities
Management of Operational Risk in Foreign Exchange, or the “Sixty Best Practices”
Foreign Exchange Transactions: Execution to Settlement Recommendations for Non-Dealer Participants