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108 Appendix 3
Regulated entities can mitigate these risks by taking steps (as
discussed in the principles) to: draw up comprehensive and clear
outsourcing policies, establish effective risk management programmes,
require contingency planning by the outsourcing firm, negotiate appro-
priate outsourcing contracts, and analyse the financial and infrastruc-
ture resources of the service provider.
Regulators can also mitigate concerns by ensuring that outsourcing
is adequately considered in their assessments of individual firms whilst
taking account of concentration risks in thirdparty providers when
considering systemic risk issues.
Of particular interest to regulators is the preservation at the regu-
lated entity of strong corporate governance. In this regard outsourcing
activities that may impede an outsourcing firm’s management from
fulfilling its regulatory responsibilities are of concern to regulators. The
rapid rate of IT innovation, along with an increasing reliance on external
service providers have the potential of leading to systemic problems
unless appropriately constrained by a combination of market and regu-
latory influences.
This paper attempts to spell out these concerns in more detail and
develop a set of principles that gives guidance to firms, and to regula-
tors, to help them better mitigate these concerns without hindering the
efficiency and effectiveness of firms.
The full document is to be found at the BIS website www.bis.org
FX Settlement Risk
CLS Bank
With the average daily turnover in global FX transactions at over US$2
trillion, the FX market has long needed an effective cross-currency
settlement process. And while transaction volumes have increased,
the way in which they’re settled has stayed virtually the same for
300 years.
Before CLS, each side of a trade was paid separately. Taking time-
zone differences into account, this heightened the risk of one party
defaulting.
CLS is a response to regulatory concern about systematic risk. It
eliminates that ‘temporal’ settlement risk, making same-day settlement
both possible and final.
CLS provides and is developing multiple commercial benefits. These
include opportunities to deal with trading counter-parties, reduce costly
reconciliation, and exploit the real-time information on currency cycling
and settlement that CLS can provide.

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