Wholesale financial markets are undergoing a rapid change due to a necessary focus on improving efficiencies and removing costs that currently exist in the post-trade space. The evolution of payments is at the very heart of this change, and a recent unprecedented Bank of England announcement on the introduction of a new omnibus account has put Fnality International at the forefront.
Angus Fletcher, senior Commercial and Regulatory advisor at Fnality explains why this is so exciting and the possibilities it creates. Prior to Fnality, Angus has spent the last 25 years working in regulatory reform and post-trade services for a number of global financial institutions; Standard Chartered, Deutsche Bank, SWIFT, Morgan Stanley and Citigroup. He has been and continues to be an industry advocate for change and improvement.
Before we talk about the significance of the Bank of England announcement, it is important to understand what Fnality is looking to achieve and how it is going about doing this. Fnality’s overarching vision is to create a peer to peer wholesale settlement ecosystem (through the use of distributed ledger technology), offering real-time cross-currency payments from a single pool of liquidity to improve efficiency, lower risk and support the rapid growth of tokenised asset markets. The Fnality solution to support this vision (Fnality Global Payments) will comprise a series of payment systems in local jurisdictions, each overseen by its home central bank and respective regulators. Participants in each payment system will use pre-funded settlement balances to make wholesale payments in real-time 24/7.
There are three core principles that will underpin Fnality Global Payments; firstly, funds held in each payment system will need to be a digital representation of money held in a central bank to ensure that participants can rely upon its value and risk profile as they would fiat currency. Secondly, the solution needs to be available in multiple currencies (currently GBP, USD, EUR, CAD and JPY are envisaged) to allow for greater efficiencies in managing fragmented liquidity. Finally, each system needs to be capable of inter-operating with multiple business platforms to provide a universal payment leg for the settlement of transactions, whether payment versus payment, or tokenised asset versus payment.
The Bank of England announcement introducing an Omnibus account within its RTGS system is a game-changer for Fnality in achieving its goals. The Omnibus account will allow a payment system operator to access the Bank’s RTGS system in a new way that has not been permitted before. A payment system’s participants will be able to pool funds within a single account, allowing them to utilise those funds to settle payment related transactions across the payment system on a 24/7 basis. The funds will have the credit quality of fiat currency as they will be held in a bankruptcy-remote account directly within the RTGS operated by Fnality. This meets the first necessary principle of the Fnality solution and differentiates it from riskier so-called stablecoins or commercial bank money. Fnality is the first organisation to apply for the new account and is now working towards completing all the necessary requirements to getting the account operational in as short a timeframe as the Bank of England will allow.
So what of the other two principles?
Fnality continues to have ongoing discussions with other central banks such as the Federal Reserve and the European Central Bank to establish additional Fnality Payment Systems for other currencies globally, based on the same distributed ledger technology and with aligned system rulebooks. The set-up of these additional local payment systems meets the second principle. Through interoperability across systems, this will enable instant settlement of FX transactions, making banks’ liquidity management more efficient and reducing the need for costly, risky correspondent relationships that exist today.
As regards the third principle, supported by its shareholder base, Fnality is exploring use cases with several digital asset platforms, determining an interoperability protocol to support the atomic settlement of transactions across distributed ledgers. The issuance, trading and settlement of digital assets in their many forms is expected to grow exponentially over the next decade. Establishing, early on, a trusted payment settlement mechanism will be a crucial enabler in realising the value of these new assets. The intention is to realise such use cases in GBP related assets following the go-live of the UK payment system, and then in other locations as they are established. It is worth noting too that we are architecting our payment systems with both forward-facing and backwards facing interoperability in mind. We want to enable our participants to leverage the potential of emerging on-chain tokenised markets, but we also recognise that it is essential to remain compatible and interoperable with legacy systems too.
To sum up, the Bank of England omnibus account is a first step on the journey to realising the vision that Fnality has set out to achieve. That vision will provide new efficiencies, risk reductions and value extraction for wholesale financial market institutions. Once local payment systems are established within jurisdictions, interoperating with each other and digital asset platforms, a financial institution will have the option of managing its cross-border cash related settlements (payment versus payment and delivery versus payment) from its home currency on a 24/7 basis, all whilst minimising credit risk (and associated capital requirements) and improving efficiency.