The Last Look…

Two weeks ago I wrote about the feedback initiative from the GFXC, part of which covered FX settlement, within which there was a short paragraph about that process which promoted quite a bit of feedback.

I noted in the column that technological innovation is targeting accelerated payment and settlement, but left it at that, because the real purpose of the piece was targeted elsewhere, however many of you got in touch to ask what could be an awkward question: Are we wasting our time with all the work aimed at promoting PvP settlement?

The gist of the arguments was that DLT, stablecoins (including those pushed by banks) and, potentially, CBDCs, will make settlement instantaneous, or at least much quicker, thereby eradicating the need for PvP and netting services. I understand where these people are coming from, but I suspect they are falling into a trap we all drop into from time-to-time – expecting a solution to be a cure-all.

I absolutely believe that a lot of the central bank-driven initiatives will result in quicker settlement – we may also wonder what the fuss about T+1 was all about – but will those services satisfy everyone? I would argue that in trade volume terms, the majority of players – speculators – prefer to net at the end of the day and settlement with one payment. I have made the point before that even a fully-automated, instantaneous, payment platform will have costs associated with it, why would a firm doing thousands of trades per day want to even pay a fraction of what they do now, when they can make one payment? The economies of scale just don’t exist.

That said, as I noted in my column a couple of weeks back, there is a healthy segment of the market, especially in the corporate and real money world, that would probably appreciate instant, or near instant, settlement. Horses for courses.

A few of you also took aim at CLS, which is a popular pastime I have to say, especially amongst those who pay the fees (and who doesn’t complain about fees?), but again, I think the answer is the same – there will still be an important place in the industry for the settlement service.

That said, I am sure CLS is aware that it will probably have to evolve, and that growth may prove harder if a section of the market is settling on a close to real-time basis, but we should not think that the service that effectively saved the FX market in September 2008 will have no place in the future.

I think it would be better if we, through bodies such as the GFXC, at least acknowledge that the FX settlement, and payment landscape more generally, is fluid at the moment, and likely to change

Although it wasn’t articulated in the feedback, I do think peoples’ comments highlight something that we should be talking about, however, how hard should we be pushing the PvP methodology at this time?

There is a sense in parts of the industry that the GFXC and central banks are obsessed with building PvP at the expense of other initiatives – some of which they themselves are driving. This does seem strange – everyone is aware that there is a lot of work and innovation taking place in the payments world, this will inevitably filter into the FX settlement process, so why are we seemingly ignoring it in our best practice work?

I think the answer is simple – these remain, largely, tests and proof of concepts, there is little in the way of concrete solutions for people to use. A standards body like the GFXC and the central banks, can only really deal with what people can use now, and highlight potential weaknesses in processes.

That is all well and good, however I think it would be better if we, through bodies such as the GFXC, at least acknowledge that the FX settlement, and payment landscape more generally, is fluid at the moment, and likely to change. To a degree regulators and providers of best practice documents are always going to be behind innovation, but in this instance, I think the work is so public, and a healthy part of the GFXC – central banks – are not only well aware of the work, but they are driving it, that perhaps we need to be more open and forward-thinking in our planning.

PvP is a vital mechanism that will continue to play a vital role in the FX industry, but perhaps we need to think about what comes next, and broaden our horizons.

colin@thefullfx.com