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BME (Bolsas y Mercados Españoles), Spain's main financial markets and infrastructure group that operates Spanish stock exchanges and the Spanish derivatives and public debt market, fixed income trading platforms, and clearing and settlement systems, has secured approval from the Bank of Spain to implement an innovative system for settling foreign exchange transactions in a payment versus payment model, addressing key risks and inefficiencies in the current bilateral settlement process.
The new BME FXS system aims to eliminate the principal risk in foreign exchange transactions settled bilaterally, where one counterparty could potentially lose the entire transaction amount if the other fails to deliver the sold currency (so-called Herstatt risk).
This initiative emerged in response to demands from banks and financial institutions seeking solutions to overcome limitations of bilateral currency settlement, particularly the rapid consumption of credit lines that restricts potential business between entities. The payment versus payment settlement provided by FXS is expected to significantly reduce reliance on credit lines, thereby increasing both transaction volumes and the number of possible counterparties.
Source: BME
Beyond risk reduction, the system offers additional efficiencies including integration with the SWIFT network and the netting of all credit and debit transactions between counterparties. These features simplify settlement operations, reduce costs, and optimise capital usage.
Financial institutions across the European Union and Switzerland will have access to the FXS system. According to Bank for International Settlements (BIS) data, foreign exchange transactions worth 18 billion euros are settled daily with bilateral risk in Spain alone. (Click here for the BIS report from December 2022, FX settlement risk, an unsettled issue).
"We are very pleased to announce this new system, which stems from our constant commitment to listening to our clients and addressing their needs. We are convinced that our neutral position as an operator of financial markets and the robustness of our technical infrastructure will allow us to offer a high-quality and highly available system to participants. The implementation of the FXS system represents an important step towards greater efficiency and security in foreign exchange transactions in Europe," explains José Manuel Ortiz, Head of Securities Services, SIX / BME.
BME is developing additional initiatives to strengthen its presence in the foreign exchange segment, with the objective of expanding its asset range and showcasing its technology and distribution capabilities through its members.
Further information on BME FXS can be found here: https://www.bolsasymercados.es/ing/BME-FX-Services/FX-Settlement
