TCA Launches Stab FX Netting Tool

VENDORS & SERVICES

TCA Consulting, the London-based financial systems consultancy house, has developed a software package that helps banks decide whether foreign exchange netting can significantly reduce their settlement risks.

The system, dubbed Software Tool for Netting Analysis Benefits (Stab), also analyzes which of four existing forex netting services is best suited for a particular bank's needs.

These four services are: Swift's Accord, FX Net, the Exchange Clearing House (Echo) and Multinet. Accord and FX Net are established bilateral netting schemes, while Echo and the yet-to-be-launched Multinet are multilateral.

Stab reads in raw trading data from a bank, usually a month's worth of forex trades. This data includes volumes, currency pairs, counterparties, amounts and value dates for spot and forward trading.

It then analyzes what the four netting services can offer to that particular bank, taking into account the counterparties and currency pairs available on each service.

The program produces a series of tables and graphs outlining settlement risk, capital charge and operational cost reductions for each of the four netting schemes.

Stab can also produce "what-if" reports analyzing the services under hypothetical conditions, such as a frequent counterparty joining a particular netting scheme.

David Field, associate director at TCA, says Stab can will be offered to banks as a standalone package, but will more usually be used as the first phase of a three-step consulting process.

If Stab's results suggest a bank could benefit from forex netting, TCA will offer to perform a cost/benefit analysis on the chosen scheme, assessing joining fees and transaction costs against risk, capital and cost reduction benefits.

Finally, if the project meets the bank's criteria and it decides to move ahead, TCA hopes to be hired to work on implementing the required netting systems, says Field.

He adds that an institution needs to be making at least 200 forex trades per day to get any benefit from netting.

A bank making 700 trades a day or more is generally a good candidate for a netting scheme, says Field, depending on its trading pattern.

However, he warns that multilateral netting services set high entrance requirements for capital and credit ratings. This means most banks are too small to join such services, he says.

Field adds that the launch of Stab is timely in light of the recent Bank for International Settlements (BIS) paper highlighting the dangers of settlement risk in the FX market (FX Week, April 1).

The BIS paper warns that regulators may impose additional capital provisions or trading limits on forex activities if banks do not take steps to reduce settlement risk.