NEX Optimisation (Nex) has launched a fully automated settlement netting service to streamline the bilateral settlement netting process for market participants.
The service will automate settlement netting of over-the-counter FX trades and will expand to all asset classes in the future.
Settlement failure rates are estimated at approximately 3% for the $1.5 billion that is settled on a daily basis between clients and their dealers. The new service will eliminate the manual process of netting between clients and their dealers by applying an API to communicate with the systems and reconcile payments for clients, banks and custodians.
Through an automated workflow, market participants will have visibility into and control over the payment preparation process for net and gross trades, which should help minimise their intra-day settlement exposure, reduce settlement fails and provide greater certainty of funding needs.
The service was developed using Traiana’s technology infrastructure, and Nex says that it will broadly benefit the FX market in a number of ways.
One benefit the firm cites is that, by reducing the lead time between netting and settlement which results in additional credit to support trading activities, the service will help improve settlement efficiency.
Another benefit of the service, claims Nex, is that it will lead to “reduced risk exposure and adherence to regulatory regimes such as the FX Global Code of Conduct and settlement risk management principles”. It is worth pointing out, however, that the Code is not regulation, but a voluntary code of conduct that firms can choose whether or not to adhere to.
Because the service could help reduce “settlement fail breaks and costly claims”, Nex says it could help reduce operational and funding costs for market participants. The firm also says that the service could increase the number of trades that can be settled and provide a standardised process for netting participants, both of which it claims would be beneficial to the market.
Joanna Davies, managing director at Traiana, comments: “The settlement netting service will allow traders to execute with any bank on any trading venue and enjoy optimised, efficient, automated and consistent post-trade processing from execution through settlement. Settlement netting processes have traditionally been fragmented across organisations and asset classes, requiring extensive manual processing, which does not reflect the way in which the market is moving. By automating the entire netting process via a central hub, we’ve brought an essential tool to the market that will significantly reduce breaks and have a direct impact on costs for our clients.”