Developed for use by central banks in emerging markets, CitiÆs domestic settlement service reduces settlement risk by simultaneously settling both sides of foreign exchange transactions. The aim of the service is to provide greater transparency and efficiency in foreign exchange trades for its clients, the bank said.
"Our domestic settlement service is primarily a risk management tool," says Akash Rathke, managing director, regional head of bank services and public sector, Asia-Pacific in CitiÆs GTS division. "It eliminates settlement risk, improves liquidity management, reduces operational costs and improves operational efficiency and effectiveness. Our solution aims to eliminate the timing mismatch in FX trade settlements by structuring a net settlement payments-versus-payments solution, to benefit market infrastructures and the banks participating therein. While the existing CLS solution is restricted to 15 currencies across the world, we have extended our existing capabilities to include non-participating CLS currencies."
The business of foreign exchange is booming. Rising recognition of FX as a separate asset class to equities and bonds has triggered a quest for alpha returns from currency investments.
Foreign exchange trades, however, carry high settlement risk due to the two-sided nature of the contract, where a timing lag in payment can occur between participants. In this scenario one party can default before the funds are settled, leaving the other exposed to significant loss. Many countries operate payment infrastructures that lack the capability to support a settlement process where both sides of a trade are settled simultaneously.
CitiÆs new service will provide simultaneous settlement of both sides of a foreign exchange trade with netted payments, helping to mitigate settlement risk and enhance operational efficiencies.
The bank says it also intends to extend this capability to central banks interested in upgrading their foreign exchange settlement infrastructure.