Fnality, the financial technology company establishing a network of distributed financial market infrastructures using blockchain or distributed ledger tech (DLT), revealed it will be able to lower banks’ intraday liquidity requirements “by up to 70%, reducing funding costs and payment delays.”
The findings come ahead of Fnality’s international launch of its blockchain or DLT-enabled payment system scheduled for next year.
Working in partnership with deep tech analytics firm FNA, a provider of regulatory and supervisory technology, Fnality has been able to “model and simulate its proposed payments ecosystem using actual shareholder bank data through FNA’s ‘Fnality Participant Simulator’ and subsequently estimate the daily liquidity requirements reduction for banks when consolidating multiple existing payment rails into Fnality’s system.”
This consequently “impacts the balance sheets supporting the settlement of interbank payments too,” the announcement noted.
Fnality shareholder Banco Santander has reportedly been engaged throughout, with senior representatives from its Treasury function involved in “testing and utilizing the underlying Fnality Participant Simulator model,” the update revealed.
As noted in an update shared with CI, Banco Santander took part in the designing of a tailored model “incorporating specific entity structure and payments configuration data was created specifically for Santander, offering a bespoke insight into the significant liquidity optimizations that could be achieved through its planned usage of Fnality Global Payments.”
It’s estimated that the “possible intraday liquidity savings for participant wholesale banks using Fnality’s payment system is between 33% – 70%, which is highly significant given the Bank for International Settlements (BIS) recently suggested potential industry savings of $8bn in this space, on the assumption the top 100 Tier 1 banks were able to reduce their intraday liquidity requirements by just 25%,” the update revealed.
Liquidity concerns are “dominating the regulatory agenda, spurred on partly by challenges posed by the global pandemic,” the announcement noted.
With a lack of liquidity playing a significant role in the collapse of Lehman Brothers which led to the Great Financial Crisis of 2008, Fnality believes in the requirement for a ‘liquidity lens’ to be “applied when designing the financial markets infrastructure of tomorrow,” the announcement added.
By facilitating a ‘Single Pool of Liquidity’, Fnality participants will “benefit from the ability to settle PvP as well as DvP transactions atomically and on a near-instant basis, empowering them to manage virtually the entirety of their cash and collateral portfolio from one place, rather than via the parking of capital across fragmented nostros, correspondents, domestic CSDs, and more,” the update explained.
Established in 2019, Fnality is a consortium of international banks that is “developing a novel asset-backed digital cash instrument for use within global institutional financial markets using Distributed Ledger Technology, with a global roll-out set for 2022.”
By providing near-real time 24/7 settlement capability and interoperating with other platforms, Fnality will “give banks the opportunity to significantly reduce their intraday liquidity requirements”, the update noted.
Fnality CEO, Rhomaios Ram, stated:
“Since the Global Financial Crisis, regulatory bodies around the global have imposed stricter regulatory measures to ensure financial institutions are effectively managing their intraday liquidity risk. The industry understands that any impediment to intraday liquidity flows could have significant ramifications for the global financial system. The pandemic has compelled banks to assess their current intraday liquidity management and stress-testing.”
“At the same time, the digital disruption of legacy financial systems has drastically enhanced the way capital and funds can be traded. Of the technologies being integrated, blockchain is ideally placed to improve the efficiency of intraday liquidity, from reducing funding costs and payment delays to improved security.
FNA Founder and CEO, Kimmo Soramäki, remarked:
“It has never been so important to effectively manage payment operations. Treasury departments must increasingly balance an increasing number of challenges with growing demand for faster settlement speeds. Network analytics and simulation provide the necessary visibility and foresight over the flows of internal and external funds, highlighting previously unseen opportunities for greater operational efficiency and resiliency. Not only will this help treasurers to make substantial liquidity savings, but it will also protect their institutions from potential funding pressures in the future.”
Santander Head of Liquidity Management, Manuel Villa added:
“Our work with Fnality on their Participant Simulator has offered Santander an invaluable window into the potential future benefits of innovative payment systems like Fnality Global Payments. As a founding shareholder in Fnality, we will continue to collaborate with them to understand how Santander can most effectively use the system to achieve the most optimal configuration for liquidity savings, utilising the Fnality Participant Simulator to test various adoption pathways.”