Module 5 Settlement Risk Guidance

Summary

This is technical guidance from the Guernsey Financial Services Commission explaining how banks should complete the Settlement Risk module (Module 5) of the BSL/2 prudential return. It sets out the methodology for calculating capital charges arising from failed delivery versus payment (DvP) trades and free deliveries (non-DvP transactions), consistent with the Basel II framework.

• Failed DvP trades: A capital charge applies where a DvP transaction remains unsettled five business days after the due settlement date, calculated by multiplying the potential mark to market loss by a factor that increases with the number of days overdue (8% for 5 to 15 days, 50% for 16 to 30 days, 75% for 31 to 45 days, 100% for 46 days or more).
• Reporting failed trades: Failed trades must be reported once more than four days past the agreed settlement date, with number of trades, nominal amount, and mark to market loss reported by time band on Line A.
• Free deliveries: Where a bank has paid away or received its side of a transaction without receiving the counter-value, the exposure is risk weighted by counterparty weight if four working days or less past settlement, or deducted from capital (using a 1250% risk weight proxy) if more than four working days past settlement.
• Daily calculation: Settlement risk must be calculated daily for all banks that could have failed trades, and subsidiaries must maintain the 8% minimum risk asset ratio and minimum capital requirements at all times, calculating material positions daily.
• Cross border trades: For transactions effected across a national border, a one working day window applies before the exposure must be included.
• Exclusions: No capital charge is required in respect of settlement or delivery risk on spot and forward foreign exchange transactions.

The guidance also details completion notes for each line of the reporting form, including how the system generated risk weighted asset equivalents (Lines B, D and E) are derived from the underlying data reported in Lines A and C.

Key obligations

• Banks must calculate settlement risk daily for all trades that could result in failed settlement
• Banks must report failed DvP trades once more than four days past the agreed settlement date, categorised by time band (5-15, 16-30, 31-45, 46+ days)
• Banks must apply the prescribed capital charge factors (8%, 50%, 75%, 100%) to the potential loss on unsettled DvP transactions based on days overdue
• Banks must calculate and report free delivery exposures separately depending on whether they are four working days or less, or more than four working days, past the settlement date, applying the corresponding risk weight or capital deduction
• Subsidiaries must maintain the 8% minimum risk asset ratio and minimum capital requirements at all times, calculating material positions daily
• Banks must include a one working day window before including exposures on cross border transactions

Applies to

banks, subsidiaries of banks

Deadlines

• 5 business days after due settlement date: Point at which a capital charge begins to apply to unsettled DvP transactions
• more than 4 days after the agreed settlement date: Point at which failed trades must be reported
• daily: Frequency at which settlement risk and material position capital requirements must be calculated