CLS, a leading provider of settlement services for Foreign Exchange markets, is launching a cryptographic “netting” service with the help of IBM Blockchain. Alan Marquard, CLS’ Chief Strategy Officer, announced at the IBM Think Conference that the platform would be the first “enterprise-level, open-for-business service” in the financial markets to be based on distributed ledger technology.
The service is expected to launch within days, according to an original report by Computer Business Review Online.
Netting is the process of offsetting the value of multiple payments or obligations due between two or more parties. When it comes to FX markets, netting allows companies to consolidate payments across currencies, time zones and national boundaries. “When companies have more organized time frames and predictability in settlements,” Investopedia says, “they can more accurately forecast their cash flows.”
But the process is not without downsides, and disputes are considered part of the cost of doing business. CBR notes that netting entails 25,000 disputes per year, and stalls the movements of up to $100 Mn in capital.
CLS currently nets a daily volume of around $5 trillion. By moving the netting process to IBM Blockchain, the time to resolve disputes is expected to fall from 40 days to under ten, with a 40% increase in capital efficiency, according to a joint white paper by IBM and CLS.
“People in the markets currently spends thousands and thousands on reconciliation and even litigation, trying to settle every little thing,” Marquard said at the conference.
However, Mr. Marquard’s enthusiasm for DLT solutions was not entirely unmixed, and his comments at the summit had some cautionary words for blockchain pioneers in the finance sector.
“What you want to disrupt is inefficiency,” he said. “[B]ut if something looks inefficient there may be 1000 reasons for that: regulators may be intolerant of change, for example. Disruption may sound exciting but make sure you do it with those who know the business processes you are trying to solve.”
Those cautions may explain CLS’ reluctance to go all-in on blockchain tech, at least in its first pilot. Although Marquard did not disclose exact numbers, he emphasized to Computer Business Review that the experiment would start small:
When asked what volumes the system would start with, he said [to journalists]: “It doesn’t matter. It will be interesting to see what we are doing by the end of Q1 though. We also start small with something like this and watch closely.”
The launch with CLS appears to be the latest new addition to IBM Blockchain. The company has also recently announced a spate of new partners, including a partnership with Telefónica to streamline telecommunications.
The author is not invested in any asset mentioned in this article, but owns other digital assets.