May 14, 2008	Wednesday	Jamadi-ul-Awwal 8, 1429

BASEL, May 13: Central bankers on Tuesday urged that more action be taken to reduce risks when settling foreign exchange transactions, according to a report published by the Bank for International Settlements.

Of $3.8 trillion in daily foreign exchange settlements, 32 per cent or $1.2 trillion were still settled by traditional correspondent banking and thereby subjected to a risk that a transacting party might renege on the payment, said the BIS.

“The financial services industry has made significant progress in dealing with foreign exchange settlement risk.

“However, more can and should be done to tackle remaining exposures and to guard against the risk of reversing the progress that has already been achieved,” said Timothy Geithner, president of the US Federal Reserve Bank of New York.

Foreign exchange settlement risk is the danger that one party in a foreign exchange transaction might pay out the amount called for while failing to receive the currency it bought in return.

A so-called CLS Bank was established in 2002 as a means to settle foreign exchange transactions on a “payment versus payment” basis, thus reducing the risk.

According, to the BIS report, some 55 per cent of foreign exchange transactions are now settled using CLS Bank.

However, Geithner pointed out that still 45 per cent are settled outside CLS.

“Recent market conditions emphasise how important it is that the settlement infrastructure supporting financial markets is robust and reliable, so that markets have the confidence to function normally even in adverse circumstances,” he added.—AFP