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Goldman Sachs, Morgan Stanley Join FX Market’s First Live Blockchain System

Platform anticipated to help boost intraday liquidity, efficiency, and reduce settlement risk

By CBR Staff Writer

The first global FX market enterprise application running on blockchain has gone live, with Goldman Sachs and Morgan Stanley among its initial eight users.

Operator CLS, which settles some $5 trillion daily, hopes the system, CLSNet, will optimise intraday liquidity, improve operational efficiency, and reduce settlement risk.

As first reported by Computer Business Review, the FX settlement firm has been working closely with IBM to develop the payment netting system, which is based on IBM’s Hyperledger Fabric-based distributed ledger technology (DLT).

(Netting entails offsetting the value of multiple positions held between two or more parties, for example to account for currency volatility caused by timezone difference. It can be used to determine which party is owed remuneration in a multiparty agreement, disputes over which tie up significant amounts of capital yearly.)

IBM’s Marie Wieck, head of blockchain at the company, described the launch as “testament to the ongoing maturity of blockchain technology and the value that it can deliver in practice.”

CLSNetCLSNet Launch: Eight Early Adopters Go Live

Six additional participants from North America, Europe and Asia, including Bank of China (Hong Kong), have committed to joining the service, with a steady onboarding of several other market participants planned in the next few months, CLS said Wednesday.

Alan Marquard, Chief Strategy and Development Officer, CLS, said, “A standardised and automated payment netting process will lead to improved intraday liquidity, reduced cost, improved operational efficiencies and ultimately support business growth.”

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He earlier declined to answer questions on volumes handled through the system, saying they would be gradually ramped up as CLS monitors functionality in a live environment.

Currently, a lack of standardisation and automation introduces risk and operational inefficiencies for market participants, the company said.

“While a large number of participants currently net with each other on a regular basis, these processes often have manual intervention and are not fully standardised or scalable. The impact of limited payment netting is exacerbated by the high settlement costs associated with emerging market currencies, despite their increased relevance for FX market participants”, CLS added.

Many FX market participants do not net payments in respect of FX trades, instead choosing to settle on a gross basis.

Such gross payments have full exposure to settlement risk, resulting in higher intraday liquidity demands and causing institutions to hold more capital. CLS working with the technology in the hope of mitigating these risks.

Bank of China (Hong Kong) GM Barry Lo said, “CLSNet [will]… enhance operational efficiency in trade matching and payment netting for non-CLS settled currencies such as CNH, and strengthen our risk management. This underscores our strong commitment to driving Fintech innovation and represents a major step forward in the application of new technology in our businesses.”

 

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