A group of influential banks in the United States and the United Kingdom has agreed to abide by a set of recommendations meant to reduce settlement risk associated with foreign exchange.

The recommendations, agreed upon by all the U.S. participants in the Society for Worldwide Interbank Financial Telecommunication, will standardize the way banks cancel foreign exchange payment requests with correspondent banks. Currently, dealings between banks and their correspondents vary.

Dennis Oakley, managing director of global markets at Chase Manhattan Corp., said this "initiative will result in the most cost-effective and widespread reduction of FX settlement exposure the industry will ever see."

The move is well timed, said John Masterson, chairman of the Swift U.S. national group and vice president at Morgan Guaranty Trust Co., because many banks will seek correspondent banking relationships in Europe with the introduction of the euro.

The recommendations address the risk of failure to settle foreign exchange transactions, a market estimated to exceed $300 trillion annually.

"We defined what we think are some minimum standards," said Arthur Magnus, chairman of the New York Foreign Exchange Committee's operations managers group and managing director at J.P. Morgan & Co. "It leaves room for banks to differentiate themselves on the types of services they support around cancellations and reconciliations."

The Swift users group effort is a response to recommendations in the 1996 "Allsopp Report," known as the "Orange Book," which was published by the Bank for International Settlements and the central banks of the Group of 10 industrialized nations and Switzerland.

Among other recommendations, the Orange Book suggested that banks negotiate cutoff times with correspondents for canceling forex deals.

The Orange Book listed a set of draconian procedures that may be used if the private sector fails to address such forex settlement risks.

U.S. banks collaborated with counterparts in the United Kingdom and with the New York Federal Reserve in hammering out the recommendations, said Mr. Masterson.

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