5.2 Introduction of the forint into the Continuous Linked Clearing and Settlement model
The Continuous Linked Settlement (CLS) model eliminates foreign exchange settlement risk, and thus by introducing the forint into the CLS system, the stability of the domestic financial intermediary system may further increase. The MNB pays special attention to the regular assessment and mitigation of risks affecting payments. In this spirit, the central bank twice performed an analysis based on the methodology of the Bank for International Settlements (BIS) to survey the domestic methods of managing foreign exchange settlement risks. The most important lesson from the surveys was that the level at which the settlement risk is perceived is not sufficient; therefore, the MNB and the supervisory authority must encourage banks to improve their risk management methods and measuring procedures. In light of all these results and in search for a solution to the difficulties seen in the financial crisis of the past years, the possibility of introducing the forint into the CLS system arose several times. The system connects the two parties to the foreign exchange transaction within the framework of a Payment-versus-Payment (PvP) mechanism, and thus eliminates foreign exchange settlement risk.47 Currently 17 currencies from all over the world can be cleared in CLS and according to estimates, 68 per cent of the foreign exchange transactions concluded in these currencies was settled through the CLS system. The relevance of the CLS mechanism is indicated by the fact that in its supervisory guidance published in February 2013, the Basel Committee on Banking Supervision48 called on central banks and supervisory authorities to encourage the widespread use of such settlement methods. Having considered the opinions of the banks and the domestic foreign exchange settlement risk exposures, the Financial Stability Board of the MNB issued a letter of intent for CLS Bank on performing the necessary preparations and will endeavour to introduce the forint into the CLS system. Prior to the decision, the MNB had several rounds of consultations with the largest players on the Hungarian foreign exchange market during which it obtained information on the banks’ position 47 48
50
on the introduction of the forint and participation in the CLS clearing. The letter of intent issued by the Financial Stability Board for CLS Bank is not binding, while at the same time it is a necessary condition for the progress of the accession process. The diligence phase, which primarily involves the studying of the local legislation on payment systems by CLS, the analysis of the FX payments by CLS and the review of the operation, procedures and message types of VIBER, started with the sending out of the letter of intent. The diligence phase is followed by the implementation phase which includes resolving the tasks identified during diligence, the harmonisation of the operative tasks and the development and testing of VIBER. CLS and MNB plan to complete the diligence phase by the end of August 2014, and to finish the project by the middle of 2015. Based on all this, the foreign exchange transactions concluded in the second half of 2015 against the forint are expected to be settled free of FX settlement risk. In addition to creating the CLS compatibility of central bank processes and systems, it is particularly important that participating banks prepare for the accession in their liquidity management and undertake the necessary developments. In order to facilitate a successful accession as soon as possible, the MNB is cooperating with the Hungarian Banking Association and the Hungarian Forex Association. This cooperation increases the transparency of the project for Hungarian banks and thus helps to ensure their active and supportive participation in the project. CLS offers two accession opportunities for the Hungarian market: direct and indirect memberships. Direct members are in a contractual relationship with CLS, they have their own accounts at CLS Bank and communicate with the clearing and settlement system directly. Direct members place the collateral for the foreign exchange transactions submitted to the system on CLS’s cash accounts according to the rules of CLS and, depending on their individual risk rating, they may enjoy the advantages of the liquidity management tools provided by CLS. However, the condition for obtaining direct membership is that the given
T he publication titled Report on Payment Systems 2013 includes further information on the advantages and operation of the system. Supervisory guidance for managing risks associated with the settlement of foreign exchange transactions (BIS, February 2013).
Payment Systems report • June 2014
