Banks eye Traiana for EM forex netting service

Industry turns to Icap-owned utility as CLS emerging markets push stalls

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Traiana project could cut the cost of trading EM currencies

A group of large banks has tapped Icap-owned Traiana to help streamline the settlement process for spot and derivatives trades in emerging market currencies.

The plan is to use Traiana's NetLink service for portfolio reconciliation across counterparties so banks can make a single net payment to each other – firms currently make hundreds of gross payments each day, which drives up the cost of trading many popular emerging market currencies.

"There is talk between Traiana and the banks about saving a significant amount of money by making settlement easier for emerging market currencies. This is simply a cost-reduction play," says the head of over-the-counter clearing at a bank in New York.

Banks will test the NetLink service in the first quarter of 2016, according to three industry participants. A spokesperson for Traiana declined to comment.

NetLink's post-trade infrastructure is already used by brokers to aggregate retail foreign exchange trades, but banks want Traiana to automate the reconciliation of dealer portfolios and deliver a net payment obligation.

As an industry, we've spoken to Traiana about taking NetLink and moving it from trade date to settlement date

"As an industry, we've spoken to Traiana about taking NetLink and moving it from trade date to settlement date. The idea is that rather than doing trade-by-trade submissions as we're trading, when it comes to settlement we would give Traiana our portfolio of trades to settle with the counterparty. Our counterparty would do the same and Traiana would do real-time portfolio reconciliation between two parties to show the amounts agreed," says a forex prime brokerage executive at a bank in New York.

"If a trade is disputed, then they get sent to the side and the counterparties can work that out. But for all the trades that were agreed through the portfolio reconciliation process, they would do a currency net and instruct both parties of the agreed settlement amount so the parties can settle that currency on a net basis," the executive adds.

Banks had hoped that CLS, which provides a multilateral netting facility for 18 currencies, would expand the number of emerging market currencies it settles.

David Puth, chief executive of CLS, declared in 2012 that the utility would double the number of currencies it settles by 2022. Three years into that 10-year cycle, CLS has added just one new currency to its settlement system, and banks appear to be looking elsewhere for a solution.

Popular emerging market currencies that are excluded from CLS's settlement system include the Chinese renminbi, Russian ruble, Turkish lira, Brazilian real and Indian rupee, which together accounted for 7.2% of global forex market turnover in April 2013, according to the latest triennial survey from the Bank for International Settlements.

CLS added the Hungarian forint to its currency basket this month, but it accounts for only 0.4% of global foreign exchange market turnover. The utility was close to adding the Russian ruble last year, only to abandon the project due to the slow build-out of Russia's real-time gross settlement (RTGS) system and simmering political tensions.

Industry participants say the criteria for adding a currency to CLS are a barrier to expanding its coverage of emerging markets. CLS insists that the central bank responsible for each currency it settles must have an RTGS system, which is not yet available in many emerging markets. The bankruptcy laws of the country must also recognise the finality of settlement.

"CLS recognises that there is a need for a solution like what Traiana has proposed. CLS is struggling with whether they offer a service like this or whether doing so would undermine the full CLS protection they offer [in other currencies]," says a source close to CLS.

A spokesperson for CLS was unavailable for comment.

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