The Bank for International Settlements (BIS) has issued a final report as part of the G20 cross-border payments program. It focuses on facilitating increased adoption of payment versus payment (PvP) to reduce foreign exchange (FX) settlement risk and improve cross-border payments.
It analyses the causes of non-PvP settlement, takes stock of existing and proposed new PvP solutions and suggests roles for the private and public sectors to facilitate increased adoption of PvP. The report has been informed by a call for ideas, extensive industry engagement and a public consultation in 2022.
The report finds that existing PvP arrangements have been successful at reducing settlement risk for much of the FX market, but certain market segments remain exposed to risk: PvP arrangements are not available for all currencies and may not be the preferred solution of some market participants or for settling certain trades. New PvP solutions can complement the existing arrangements by providing flexibility and functionalities such as real-time settlement or 24/7 operations, expanding coverage to the retail market, and supporting emerging market currencies.
However, existing as well as new PvP arrangements face barriers to broad adoption, including: (i) weak incentives for market participants to settle FX trades using PvP; (ii) technical challenges for PvP providers to access and interoperate with real-time gross settlement systems; and (iii) legal challenges for PvP providers to reconcile differences in national legal and regulatory frameworks. Facilitating further adoption of PvP depends on whether providers of PvP services can overcome these barriers.
Commenting on the report in an emailed statement, Alex Knight, head of the Europe, Middle East and Africa regions for Baton Systems, said: “As highlighted by the latest BIS figures, $2.2 trillion of daily currency turnover was subject to settlement risk, as the percentage of non-CLS currencies trading increases. Against this backdrop there is a clear need for platforms to efficiently reconcile, net, and safely settle FX transactions for a greater number of currencies and participants on a bi-lateral PvP basis.
“From a risk management perspective, it’s imperative that solutions are expanded to account for new currencies for which volumes are growing but where safe settlement is not possible, such as the offshore Renminbi. It’s not just non-PvP currencies, however, that need to be examined. There are currencies eligible for settlement on existing PvP platforms that settle with difficulty, and sometimes fail, due to liquidity related concerns.
“Liquidity constraints in currencies such as Hungarian Forint or South African Rand can create significant challenges for banks that are required to fulfil obligations in the context of a single daily settlement batch. There is, therefore, a heightened need for greater flexibility in PvP settlement cycles to better accommodate liquidity fluctuations in challenged currencies.
“With market participants continuing to explore and plot their journey from antiquated systems to platforms supported by modern technology, the speed and security that DLT provides is sure to emerge as a key focal point, helping overcome barriers to entry. The use of DLT-based platforms can fit neatly within a firm’s tech stack without disturbing existing bi-lateral relationships, thus promoting integration and interoperability between legacy and emerging systems. Going further, for years Baton’s DLT solution has facilitated clients settle PvP using existing payment rails and availability of bank account money, overcoming legal or regulatory barriers that exist for adopting some PvP solutions.”