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 FX Everywhere solution to process the settlement of trades between HSBC subsidiaries and the platform has now processed $4.3 trillion in 6.3 million trades.
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.
A DLT that does not use tokens
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.
Talking to Mark Williamson, global head of FX Partnerships & Propositions at HSBC, the bank is happy the solution does not use tokens. That’s because the DLT directly integrates with fiat currency so you have PvP transactions.
If a token were involved, then you need the conversion to and from the token, which Williamson sees as less efficient. It becomes PvPvP. He also views tokenization as potentially creating fragmented liquidity.
HSBC and Wells Fargo are talking to other banks and non-bank financial institutions about using the FX Everywhere solution. One of the advantages is that institutions don’t need to host their own DLT nodes, and the on and off-ramps are familiar to them.
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 Williamson. “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. Williamson noted that this was being used to settle digital asset transactions as DvP as opposed to PvP.
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.
Update: HSBC internal usage figures and comments from Mark Williamson were added.