A mission-critical platform for a financial system that allows no errors

When two banks or financial institutions trade on the foreign exchange (FX) market, they carry out immediate (spot) or future (forward) transactions. In either case, a settlement takes place: one party delivers one currency and the other delivers another. This poses a risk, one that is present in thousands of daily transactions: Herstatt risk. This risk arises when one of the parties fails to deliver the consideration.

This constant exposure to risk is the starting point for our client. A leading market operator in Europe was looking to implement a currency transaction settlement platform capable of mitigating this risk.

To achieve this, the service receives the agreed amounts in each currency from each party and, only when both have fulfilled their payments, proceeds to make the final transfers to the counterparties.

If one of the parties fails to transfer the corresponding amount within the established deadline, the service returns the amount received to the complying entity. However, it does not guarantee settlement, as the platform is not a CCP (clearing house).

In addition, the infrastructure on which this service runs is capable of supporting thousands of critical transactions, ensuring traceability, agility, and, above all, security.

Technology to build trust

The platform was not only developed to the customer’s specifications, it was also built in accordance with the standards and requirements of the most regulated, audited, and globally connected system in existence. Our customer needed to:

• Orchestrate the simultaneous and secure settlement of currencies.
• Enable a Payment versus Payment (PvP) mechanism to make this possible.
• Integrate with standard SWIFT messaging flow financial systems.
• Reconcile cross-entity transactions and payments.

The perfect orchestration of an operation

How the only platform where currencies can be settled at the same time, dozens of entities are connected, thousands of transactions are produced every day, and there is no room for error works.

1. The settlement order

Entities exchange their data: amounts, currencies, dates. These instructions are launched either from SWIFT channels, REST API from an external trading platform, or manually.

2. Validation

Not only must the counterparties match, but each line of data must comply with regulations, format, and be consistent. Otherwise, it does not happen. Not here.

3. Matching and netting of balances

Each transaction is matched with its counterpart. But the platform goes further. If there are several transactions between the same pair of entities, they are consolidated to avoid cross-transfers and thus optimize payments and collections using a bilateral netting algorithm. If A had to pay 10 and receive 7 of the same currency, it will only have to transfer 3.

Less money in circulation, fewer movements, less exposure to risk, and greater accuracy.

In any case, the platform gives each entity the option of deciding whether or not to apply bilateral netting. If it is not applied, the service must receive and process the gross amounts and settle the final amounts resulting.

4. Pay-in call

The platform issues a call for funds so that each entity deposits the exact amount corresponding to it within a specified period or time limit. No payment is executed if the other has not been confirmed. No one gives without receiving thanks to the Payment against Payment system.

5. Synchronized pay-out

When the solution validates the transaction, the currency exchange is executed. The simultaneity of the exchange is executed, eliminating principal risk.