Statement of Guidance - Foreign Exchange Risk Management

Summary

This is a CIMA Statement of Guidance setting out best-practice standards for banks to manage foreign exchange (FX) risk, including both general FX exposure risk and FX settlement risk. It applies to banks licensed in the Cayman Islands and describes the kind of governance, policies, measurement systems and controls CIMA expects a bank's board and senior management to put in place.

General FX Risk Management

• Board approval: The board of directors should approve a written FX risk policy and review it periodically.
• Adherence and staffing: The board should ensure adherence to the policy and ensure competent staff manage FX exposure.
• Reporting: The board should receive periodic reports from senior management.
• Exposure limits and trading authority: Banks should set prudent exposure limits, define who may trade in FX, and identify approved currencies.
• Internal audit: Banks should maintain internal audit coverage of FX and settlement processes.

FX Settlement Risk

• Nature of exposure: The guidance explains the nature and duration of settlement exposure, running from the unilateral payment cancellation deadline to final receipt of funds.
• Policy and oversight: Banks are expected to have board-approved settlement risk policies together with senior management oversight.
• Measurement procedures: Banks should have clear procedures for measuring and aggregating settlement exposures.
• Cancellation deadlines: Banks should understand cancellation deadlines with correspondents.
• Estimation techniques: Banks should use robust estimation techniques where exact measurement isn't feasible.
• Risk-reducing arrangements: Banks should consider risk-reducing arrangements such as netting or third-party settlement services.

As guidance rather than binding rules, it functions as CIMA's statement of the standards it expects banks to meet in practice, informing supervisory assessment of a bank's FX risk management framework rather than imposing statutory deadlines.

Key obligations

• A bank's board of directors should approve a written policy on foreign exchange risk.
• The board should review the FX risk policy, techniques, procedures and information systems at least once a year.
• The board should ensure adherence to the FX risk policy, techniques, procedures and information systems.
• The board should ensure qualified and competent senior management are employed to manage and control FX exposure.
• The board should direct senior management to submit a comprehensive written report on management of FX exposure to the board at least once a year, plus other reports as required.
• A bank should establish a written FX risk policy that states principles/objectives, sets prudent exposure limits, defines personnel authorised to trade FX, and identifies approved currencies.
• A bank should develop and implement techniques and information systems to continually and accurately measure FX exposure and gains/losses.
• Banks should maintain adequate internal audit coverage of FX and settlement processes, with audit reports distributed to management and follow-up on corrective actions.
• A bank's board should establish a policy on foreign exchange settlement risk, integrated with overall counter-party risk policy, reviewed regularly and modified as circumstances change.
• Senior management should exercise oversight of settlement exposures and define clear lines of authority and responsibility for managing FX settlement risk.
• Banks should identify with certainty the unilateral payment cancellation deadline for each currency and document cancellation cut-off times with correspondents, negotiating terms where none exist.
• Banks should measure minimum and maximum FX settlement exposures, accounting for the period of irrevocability and period of uncertainty until receipt is positively confirmed.
• Where estimation techniques are used to measure settlement exposure, management should be able to demonstrate the techniques do not significantly underestimate exposure.
• Banks with significant FX settlement exposures should give strong consideration to using risk-reducing arrangements (e.g., netting, third-party services) and incorporate their use into exposure measures and limits.
• Banks should have procedures for informing key counter-parties when significant operational problems affecting settlement arise.

Applies to

banks