We are living in interesting times, with the functioning of the global economy under pressure from aggression or political influences. Whether you agree or disagree with opinions on the global landscape that “globalisation is reversing,” or that the “world population is becoming territorial,” one common theme remains: global trade and cross-border investment continues.
However, financing of obligations and repatriation of funds may be significantly hindered by access to liquidity and local market operating restrictions. This is more prevalent in emerging economies, where the participants in local interbank FX and money markets are subject to low or unattractive credit ratings.
The functioning of local FX markets is often impeded by banks waiting for the “first mover” to send their payments before releasing theirs. Bank providing FX liquidity to counterparties may require those counterparties to bank with them and to pre-fund their accounts prior to the bank releasing their payment. In many cases the processing of information and management controls require unique in-house processes which may be semi-automated. With next day reconciliation, payment fails in counter currencies are not known until after settlement date. Starting next day, the process of chasing overdue payments and recovery of lost interest begins.
Local FX markets will benefit from addressing these restrictive processes and developing a fair and standardised operating model:
Where Market Participants have a choice of FX liquidity providers
Where the exchange of information is real-time and visible to both sides of a transaction
Where currency payments are exchanged real-time “payment-versus-payment” (PVP)
Where reconciliation is real-time
Where access to liquidity is more freely available
Settlement Circle is developing a solution to provide a standardised Settlement Optimisation Service, aimed at unlocking liquidity. Contact us to find out more.
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