Japan Regulator Said to Survey Banks on Currency Settlement Risk

Japan’s financial regulator plans to survey banks to determine how they manage the risk of currency-trading partners failing to honor payments, according to a document obtained by Bloomberg News.

The Financial Services Agency survey will ask banks, brokerages and certain regional lenders whether they use foreign-exchange settlement services that reduce such risk, the document dated June 10 shows. The questionnaire will be conducted this month, people with knowledge of the matter said. Takuji Yano, a spokesman for the regulator, declined to comment.

The survey draws on guidance issued by the Basel Committee on Banking Supervision in 2013 on how to manage the settlement of transactions in the $5.3 trillion-a-day foreign-exchange market. Growth in the volume of currency trading has magnified what is sometimes known as Herstatt risk, after the German bank that failed to pay its part of a currency deal when regulators withdrew its license in 1974.

The FSA will ask banks whether they use payment-versus-payment systems such as those provided by CLS Group Holdings AG, which settles foreign-exchange transactions for dozens of global banks, and to explain if they don’t. The Basel committee’s guidance urges banks to use the so-called PVP mechanisms where possible to mitigate settlement risk.

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