Setting goals for currency clearing

In the world of currency trading, improvements are needed in the settlement of cross-regional currencies and the onshore clearing of US dollars, says Latiff at JPMorgan.
Abdul Raof Latiff heads treasury services clearing and foreign exchange in Asia at JPMorgan Treasury Services. He talks about the state of connectivity in Asia and the opportunities for banks to do business in the region.

To what extent has Asia adopted new technologies to facilitate clearing and settlement?
Around 10 years ago, almost three quarters of countries in this region did not have a RTGS (real time gross settlement) system in their local currency. This has changed; typically in each country there is now a way to clear cheques and giro transactions and also methods to clear telegraphic transfers locally. Some markets have their own unique systems in place while others have consolidated these together, especially the ones that are electronic. A lot of these capabilities used to be manual and labour-intensive. Now almost all countries in the region have embraced electronic capabilities and they have the ability to move money on a same-day basis.

Building a clearing system is not just about hooking the banks together, it is also making sure the flow of funds in the country from all the banks is managed, in order to avoid systemic risk. There is also the process of managing the liquidity in the country in terms of how the flow of funds throughout the day will be able to support various commercial activity, from retail banks to investment banks.

What are the factors that have initiated change in booming economies such as China and India?
There are a couple of factors driving efforts there. One is the fact that their economies are continuing to grow; the sheer volumes of domestic transactions is rising. International trade activity is also on the increase, so clearly there is a requirement to have adequate infrastructure in place. China and India are probably the two countries that have developed this framework more rapidly than anybody else.

In emerging countries such as Vietnam and Indonesia, the local banks have started to offer customers a method of making payments into China on a same-day basis. The ability or requirement to move money quickly in Asian economies is on the rise these days; people want to settle transactions faster.

What are the international banks doing to help drive electronic clearing and settlement in the region?
All central banks have an interest to keep their currencies stable, so the financial infrastructure development is crucial for all of them. They need to make sure the infrastructure is something they can support not just locally but also for their clients or dealing parties internationally.

The infrastructure is put together by a number of banks; the large local banks usually have the most liquidity for that currency and they generally discuss these issues with the central banks and some of the large international banks. Our strategy with local clearing is to be a direct clearer, wherever it makes economic sense to do so. In some cases we also have large local banks as partners in certain markets to help us facilitate that.

What are the issues around clearing and settlement of foreign exchange?
A key issue that will be discussed at Sibos is that of clearing and settlement of foreign currencies in different countries. Some banks in the region say they need a dollar clearing system in their markets. The Hong Kong Monetary Authority (HKMA) for example has developed a domestic and regional RTGS system called the Clearing House Automated Transfer System. The Clearing Corporation of India Ltd (CCIL) has built a domestic system which helps it clear US dollars for all the banks that buy dollar rupees; this is for treasury and not commercial use.

CLS (continuous linked settlement) is generally the platform being used by major banks globally but not all members are participants of CLS and not all currencies are available in CLS. So therefore some countries where banksÆ counterparties are mainly domestic, and the local currency is not on CLS, have a settlement system that is not as quick as international banks or investors would prefer. Fortunately some countries have taken the initiative locally.

Has China adopted US dollar clearing?
In China, the Bank of China is the appointed US dollar clearing and settlement agent, so renminbi can be transacted at one end as per the regular process; now the same would apply for US dollars.

For local banks, their key interest is normally the local currency-clearing environment, and they would like to keep their options open. Global banks tend to handle dollar clearing out of the United States. The challenge is how to get banks to support a model for clearing US dollars in other countries. This is vital to Asia, where so many economies are either explicitly or de-facto tied to the dollar.

The US dollar facility is not open to foreign banks in China yet. From a treasury clearing perspective, Tokyo and Philippines are fairly mature but we are seeing good take up in Hong Kong, Philippines, and with CCIL in India, where most of the major Indian banks are already on board. Malaysia is not doing anything locally but has linked up with the HKMA. We clear almost 70% of the countryÆs foreign exchange out of Hong Kong.

LetÆs discuss connectivity in Asia, what are the challenges on that front?
ThereÆs a lot more work and education required by banks when they apply straight-through processing (STP) principles to the international movement of money. LetÆs say a bank in Japan makes a payment to a bank in Australia, thatÆs where the real landscape of STP controls really comes into place. This means the banks in Japan really must know how to format money transactions going into Australia. Banks are supposed to follow the Swift format for messages but not all of them necessarily do so. They are receiving and sending orders across multiple channels û e-banking platforms, third-party applications and so on. So it is very hard to manage STP when you canÆt rely on a single pipe.

In addition some domestic banks donÆt like to manipulate orders received from clients, and will send transactions as is. Clearer banks like JPMorgan, which sit in the middle of this process and move the money, have developed all sorts of artificial intelligence and logics around routing. If our clients canÆt achieve STP, we try.

What are the major issues that are going to be discussed at Sibos?
One of the major issues is Asian offshore clearing, or the process of US dollar clearing out of the US. The second issue is intra-Asia payments; for a majority of Asian countries the major counterparty used to be the US. But nowadays a lot of international trade is being done within Asia. China is doing a lot more trade with Asian countries for example.

So the challenge is how to facilitate a payment from Singapore to someone in China in renminbi, or from a buyer in Korea wanting to pay in Indonesian rupiah. Corporates tend to try to get round this by opening up accounts in as many countries as possible but more innovative solutions can be structured to address financial institutions.
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