Today London startup Finteum announced the latest successful trial of its blockchain intraday liquidity solution for bank treasury. Participants included Barclays, BNY Mellon treasury, Citi, Natwest and ten other banks, with Euroclear taking part for for non-DLT settlement.
So far, three of the banks have committed to going live on the platform in Q2 or Q3 2023. Over the last year, the solution has been extended from intraday FX swaps to include repo, so it now provides solutions for two common short term funding mechanisms for banks.
As interest rates rise with inflationary expectations, the interest costs associated with managing bank liquidity become more significant. And Finteum expects to save participant banks millions of dollars annually by reducing the liquidity buffer they need.
The enhanced Basel III bank liquidity requirements following the Great Recession have existed during a benign interest rate period which is starting to change. Not only that, but central banks are unwinding the easy money that’s been available since the onset of Covid, making liquidity more scarce.
These issues were reflected in a Finteum poll of trial participants, 59% of whom ranked liquidity optimization as a high priority for 2022/23. Nineteen percent said it was a higher priority compared to last year.
The Finteum solution
Finteum is an open marketplace where banks might either place an order or a request for quote (RFQ). For example, it might issue an RFQ to a specific counterparty to see if they’re willing to buy securities (reverse repo) for around 40 basis points.
Banks like the shared record that DLT provides for pre-trade negotiations, which means there won’t be trade failures when two parties find their confirmation for the same trade doesn’t agree. Also, Finteum can’t view the pre-trade negotiation, which is shared confidentially peer-to-peer. In contrast, the status quo is that platforms aggregate bank data and sell it back to the banks.
Additionally, banks host their own nodes meaning they can continue to trade with each other rather than being locked out if Finteum goes down. This greater resilience contrasts with centralized platforms such as the LSE’s Refinitiv FX Trading platform, which had an outage last year.
A key addition in the latest trial was Euroclear for settlement, using conventional messages for triparty settlement. That means delivery versus payment settlement is within 45 minutes, although hopefully less.
“The banks seem to be keen on the idea of using what’s already there, using existing connectivity, existing messaging, the existing infrastructure that Euroclear has built that works very well,” Brian Nolan, Finteum CEO told Ledger Insights. “You can get a lot of the business benefit without doing a lot of the build work.” He added that settlement times are quick enough for most banks. The repo transactions will be up to 45 minutes, with FX swaps are expected to settle in 30 minutes.
“Banks are keen to start with infrastructure that’s already there, see how it goes, and then maybe later we can migrate to something that settles a bit more quickly.”
Finteum is exploring other settlement solutions. These include BNY Mellon’s triparty infrastructure for U.S. dollars, CLS Now and DLT-based settlement solutions such as Fnality, the bank-backed synthetic CBDC payment platform, and Baton’s Core FX, the payment versus payment (PvP) settlement solution used by HSBC and Wells Fargo.
Settlement times matter because the minimum intraday transaction is expected to be for three hours with an average of around six hours. As a result, late payments are penalized by escalating amounts determined by Finteum’s rule book, which eight participant banks helped develop. The longer the delay, the bigger the penalty and they’re steeper around month-end or quarter end.
So far, Finteum has raised angel funding, but it’s in advanced discussions for a venture funding round. It’s not currently planning a strategic round, as Nolan says it’s too early.
The solution uses R3’s Corda enterprise blockchain. Asked whether there was any reluctance to operate a node, Nolan said no. “The banks that we’re dealing with are quite sophisticated. They’ve been looking at DLTs for years, so they’re not scared about deploying a node.”