It is not hard to see why there is interest in using distributed ledged technology (DLT) for FX settlement. According to the 2022 Bank for International Settlements (BIS) triennial survey, the daily FX turnover subject to settlement risk was $2.2 trillion – a sum that prompted the bank’s committee on payments and market infrastructures to call for innovative proposals for addressing settlement risk.
But progress has been uneven, to say the least, with the highest profile rejection of the concept coming from the Australian Securities Exchange (ASX). Last November, the ASX announced that it had pulled the plug on a DLT project to replace its legacy clearing and settlement system six years after it was first mooted.
Fnality – a consortium of international banks created to establish a network of decentralized financial market infrastructures – was expected to introduce its sterling payment system last October, but this was subsequently pushed back to the second half of this year to allow more time to complete relevant regulatory and onboarding work.
The firm’s CEO, Rhomaios Ram, says its rollout plans for a fully compliant, accessible and secure network of DLT-based wholesale payment systems are continuing and that it is in detailed discussions with the Bank of England.
“Alongside this we are progressing towards the launch of wholesale payment systems in the US and Europe, which are on track to occur from 2024 onwards, again subject to local regulatory approval,” he adds.
In December 2021, State Street and Vanguard announced that they had completed the margin calculation process for a live trade of a 30-day foreign exchange forward contract through the use of Symbiont’s distributed ledger technology.
It was suggested at the time that deploying these contracts on DLT would facilitate more frequent and automated valuations, while also enabling parties in the network to move and settle collateral instantaneously, significantly reducing counterparty risk.
But there seems to have been little further progress over the last 14 months, with a spokesperson for Vanguard merely saying it continued to collaborate on the project with the goal of bringing it into full production “in the future”.
Momentum
One initiative that seems to have real momentum is that between HSBC and Wells Fargo, whose blockchain-based solution for bilateral FX settlement was extended to include the offshore yuan (CNH) last November.
CNH is the fifth currency to be settled between the two banks using a shared settlement ledger that already covered the US dollar, Canadian dollar, pound and euro. In the 12 months following the start of the project in December 2021, they settled over $200 billion in transactions and there are plans to add additional currencies over the coming months.
The shared, private ledger is managed by joint operations teams at HSBC and Wells Fargo, with full visibility by each of the parties to the relevant FX settlement, along with shared FX transaction records.
The platform runs on Baton Systems’ distributed ledger technology. According to Alex Knight, the firm’s EMEA head, ongoing geopolitical and market factors continue to drive the surge in volumes across currencies ineligible for riskless settlement.
“The most recent BIS triennial survey found that the total quantity of daily FX volume subject to settlement risk had risen since the last survey in 2019,” he says. “As a consequence, there is a growing need for market participants to efficiently reconcile, net and settle FX transactions for a growing number of currencies on a payment vs payment (PvP) basis.”
Knight suggests that DLT-based solutions already go a long way to enabling riskless settlement in a broad and easily extensible range of currencies and that more and more financial institutions are adopting solutions to manage settlement exposure across a much larger range of the currencies they actively trade.
There is a growing need for market participants to efficiently reconcile, net and settle FX transactions for a growing number of currencies on a payment vs payment basis
Alex Knight, Baton Systems
Of the programmes that are ongoing, last November DBS said it had successfully tested trading of Singapore dollars and yen using permissioned decentralized finance (DeFi) liquidity pools on a public blockchain. Han Kwee Juan, the bank’s group head of planning and strategy, suggested DLT would fundamentally change settlement processes.
HSBC was one of 11 financial institutions to trial a DLT-based intraday FX swap and repo trading platform from Finteum (a bank-led initiative to create a global financial market for intraday FX swaps on distributed ledger technology) last year. But it did not subsequently sign up, perhaps because it has its own DLT-based platform – FX Everywhere – which it has used for netting and settlement of FX trades since 2018.
“To date, we have settled around $5 trillion through FX Everywhere across 13 currencies,” explains an HSBC spokesperson. “The platform enables participants to efficiently settle bilateral cross-border obligations across multiple onshore and offshore currencies, coupled with the added flexibility of extended settlement windows to optimize PvP risk reduction opportunities.”
