Management of FX settlement risk in Hungary (Report II): Payments and securities settlements

[...] The objective of this study is to analyse - relying on 2006 data - FX settlement risk that may arise in the domestic banking system under its current operations, and to chart the changes which took place after 2000, covering improvements and, if necessary, formulating (new) recommendations to reduce risks. As will be referred to in many cases, this study actively relies on the material published in 2000, including the methodology it describes in detail. As a number of central banks (for example Riksbank and Norges Bank) are using the BIS methodology plus other (regular and specific) statistical reports to analyse FX settlement risk in the credit institution sector, along with all its consequences for financial stability, this latest analysis involves a deeper approach, reaching somewhat beyond the constraints of the 2000 publication. In the first chapter we will demonstrate how FX settlement risk is treated among other risks to which banks are exposed, including its dimensions and the impact it may have on financial stability, and the means available to reduce risks in general. The second chapter contains a brief description of the 2006 survey and a summary of general views and overall concepts relating to the information obtained through the questionnaires and personal interviews. The third chapter provides an analysis of the data conveyed in the 2006 survey and - minus the composition effect - a comparison of the results from 2000 and 2006. The fourth chapter offers an overview of the personal interviews, and at the end a summary of the results, conclusions and recommendations for future purposes, where deemed necessary.