(Bloomberg) -- A sizable amount of currency trades are at risk of failure every day and this will be a key focus for an industry code of conduct review this year, the Bank of England said.
The central bank estimates that around 10% to 15% of the daily $7.5 trillion-a-day foreign-exchange market’s turnover is settled without any risk mitigation and warns policymakers could move to enhance regulation, said Philippe Lintern, head of the bank’s FX division, on a panel at the TradeTech FX conference in Amsterdam.
The US move to a one-day securities settlement cycle in May has focused attention on the risk of failed trades. With the regulatory shift putting currency markets, which take typically take two days to complete, out of step with US equities, many overseas investors have been sent scrambling to complete trades on time.
“The risk is still material at the market level,” said Lintern. “Frankly if we as a market don’t fix it ourselves, at some point our good regulatory friends will find a solution for us, which will probably be considerably more expensive.”
Lintern said the issue will be a key area of focus for the Global FX Committee, which defines best practices and guidelines for the market, in a review of its code that is set to conclude by December. The code, which is complementary to local rules and not legally binding, was established in 2017 after a global benchmark-fixing scandal.
CLS, the world’s largest foreign-exchange settlement firm, was founded in 2002 to try to reduce settlement risk, but its so-called same day payment-versus-payment system does not include all currencies, with many emerging market transactions left out. The Bank for International Settlements found the lack of this type of service for certain trades, alongside its cost, was increasing the trade failure rate and threatening financial stability.
The currency market is less regulated than other asset classes, as it stretches across different time zones and jurisdictions, with a large portion of trades done directly via dealers and brokers, rather than through a centralized exchange.
There are currently over 1,300 market participants but the group is working on stepping up engagement with asset managers, Lintern added, given the bulk of those committed are banks. Improving FX data transparency is also another focus for the review, he said.
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