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HSBC and Wells Fargo have extended their FX settlement system that uses DLT to include Chinese Yuan (CNH) bilateral transactions. The two banks started using the solution at the end of last year and have now transacted more than $200 billion between them. So far, transactions have been in USD, EUR, GBP and CAD.
However, HSBC has used the same solution to settle several trillion in trades between HSBC subsidiaries.
By using DLT, the companies have shared FX transaction records and full visibility into the transactions, reducing the need for reconciliations. The solution enables PvP net settlement in commercial bank money compared to CLS, which operates in central bank money. It is also less restrictive in terms of settlement timing. The ultimate benefit is a reduction in risk.
Baton System’s Core ledger powers the system and, as a legal framework, uses the Baton rulebook. Baton’s technology uses distributed LEDGER that is not a blockchain and focuses on workflows. It is not a token-based system.
The Committee for Payments and Market Infrastructures (CPMI) recently published a report investigating the risk exposure of the FX market, which clocked $6.6 trillion in average daily trades in 2019. On any given day, there’s potential for $2.8 trillion in losses.
The CPMI is particularly interested in this sort of PvP solution because it can reduce settlement risk.
“Extending CNH PvP settlement to Wells Fargo is an important milestone for reducing Herstatt Risk outside G10 currencies,” said Mark Williamson, global head of FX Partnerships & Propositions at HSBC. “This development is only our first step in extending our coverage into Emerging Markets currencies.”
Several solutions now plan to target interbank payments using blockchain or DLT, but Baton’s Core has a head start. The Regulated Liability Network is part of a Proof of Concept by the NY Federal Reserve that includes both of these banks. Fnality, backed by 17 major financial institutions, has been recognized in the UK as a systemically important payment infrastructure and plans to launch next year. And JP Morgan, DBS Bank and Standard Chartered have backed Singapore-based Partior. In addition, SWIFT is also working in this area.
More to follow.
