October 1, 2018 / 12:08 PM / 21 days ago

Euroclear to offer dollar settlement in central bank money for first time

LONDON (Reuters) - Post-trade services provider Euroclear said on Monday its UK and Ireland arm had linked to the U.S. Federal Reserve settlement service, enabling it to settle dollar transactions via a central bank payment model for the first time.

The group said it was the first non-U.S. financial services infrastructure to connect to the Fed’s National Settlement Service. While Euroclear UK and Ireland (EUI) already offers settlement in “central bank money” for sterling and euro transactions, hooking up with the Fed allows it to expand the service to dollars.

Central bank or sovereign money refers to money issued by a central bank. EUI’s existing dollar settlement was based on commercial bank money, which is generated when banks issue loans or conduct transactions in excess of their actual currency holdings.

Euroclear said customers would now get dollar cash proceeds from a sale of securities from the moment each transaction settled. Banks would be protected from possible risks stemming from another settlement bank’s failure to pay.

The ability of settlement banks to make payments in the Fed’s accounts would be underpinned by funds they hold with the Bank of England, the group said.

Ian Dowglass, EUI’s head of innovation and business transformation, said there had been big client demand for the service in dollars. It has offered settlement in central bank money for sterling since 2001 and settles an average 425 billion pounds worth of sterling transactions per day.

Dollar transactions, on the other hand, were between $2 billion and $5 billion a day.

“It’s all part of risk reduction. What clients now get is absolute central bank settlement in all securities transactions in three currencies,” Dowglass told Reuters. “There is no longer a layer of commercial bank risk.”

Worldwide, the Euroclear group settled the equivalent of 733 trillion euros in securities transactions last year, via a total 215 million transactions and it held 28.6 trillion euros in assets for clients.

Reporting by Sujata Rao

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