Euroclear UK & Ireland (EUI) has become the first foreign financial market infrastructure to connect to the Federal Reserve’s National Settlement Service, enabling clients to settle transactions in US dollars efficiently and safely in central bank money.

EUI is now able to offer all three of its settlement currencies – US dollars, Pound Sterling, and Euros – in a central bank payment model.

This new central bank US dollar settlement model addresses residual intra-day credit and operational risks between settlement banks that existed in the previous commercial bank money model. It means that customers of each settlement bank are assured that they will receive the dollar cash proceeds of a sale of securities from the moment that each transaction settles in EUI. The settlement banks in turn are protected against the risks they take on each other through the process of settling in central bank money and have a more efficient and controlled settlement process.

Currently, settlement banks undertake end of day bilateral US dollar settlement in commercial bank money. In this model one settlement bank could be exposed to end of day credit and operational risk due to the failure of another settlement bank to pay. In this new multilateral model, EUI calculates settlement bank positions and instructs payments directly onto accounts at the Federal Reserve Bank of New York through its National Settlement Service.

The ability of settlement banks to make the required payments in the Federal Reserve accounts is underpinned by funds held by the banks with the Bank of England. This provides payment protection and certainty against the risk of intra-day insolvency events between settlement banks.

This process is in line with the highest international standards including the Principles for Financial Market Infrastructures of the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO).

John Trundle, CEO of Euroclear UK & Ireland commented: “We are extremely pleased to be able to offer this unique and path-breaking service through the Federal Reserve. The connection to the National Settlement Service strengthens the robustness of US dollar settlement for our clients, provides greater visibility and efficiency of the settlement process, and a reduction in systemic risk. It is a great step forward for our industry.”

Euroclear UK & Ireland (EUI) is the central securities depository (CSD) of the United Kingdom (including Jersey, Guernsey and the Isle of Man) and Ireland for domestic securities.

Source: Euroclear