Close collaboration between public and private sector stakeholders could increase the adoption of payment versus payment (PvP) arrangements, unlocking the potential of innovation in new settlement solutions while mitigating risks, according to a report from the Bank for International Settlements (BIS)' Committee on Payments and Market Infrastructures (CPMI).
Facilitating increased adoption of PvP – a report published as part of the G20 cross-border payments programme – also highlights that central banks can play a decisive role in this effort through their multi-functional roles as real-time gross settlement (RTGS) system operators, settlement asset and liquidity providers, payment system overseers, financial institution supervisors and conveners of industry stakeholders.
Cross-border payments often involve a foreign exchange (FX) trade that exposes the counterparties to settlement risk, even of losing the full principal amount. Public authorities, including central banks, have been promoting the use of PvP arrangements for decades because they reduce this risk by ensuring that the final payment of one currency occurs if and only if that of the other currency takes place.
Existing PvP arrangements have been successful in reducing settlement risk for much of the FX market, but certain segments remain exposed because these arrangements are not available for all currencies and may not be the preferred solution of some market participants or for settling certain trades.
The report takes stock of existing and new proposed PvP arrangements and finds that both these arrangements face similar barriers to broader adoption, including weak incentives for market participants to settle FX trades using PvP; technical challenges for PvP providers to access and interoperate with RTGS systems; and legal challenges for PvP providers to reconcile differences in national legal and regulatory frameworks.
Whether existing and new FX settlement solutions can facilitate further adoption of PvP depends on whether the providers are able to overcome these barriers.
The report has been informed by a “call for ideas”, extensive industry engagement and public consultation in 2022. The CPMI will further engage with industry stakeholders to explore possible practical actions to expand PvP settlement. In cooperation with other public stakeholders and relevant international committees, the CPMI will continue to monitor the evolution of FX settlement risk and PvP adoption with the aim of reducing settlement risk and enhancing global cross-border payments.
Re-disseminated by The Asian Banker