Euroclear UK & Ireland offers dollar settlement in central bank money through Fed

Euroclear UK & Ireland  has become the first foreign financial market infrastructure to connect to the Federal Reserve’s National Settlement Service, enabling clients to settle transactions in US dollars in central bank money.

By Richard Schwartz

Euroclear UK & Ireland (EUI) is now able to offer all three of its settlement currencies – US dollars, pound sterling, and euros – in a central bank payment model.

The new settlement model addresses residual intra-day credit and operational risks between settlement banks that existed in the commercial bank money model. Previously, settlement banks undertook end of day bilateral US dollar settlement in commercial bank money. In this model one settlement bank could be exposed to end of day credit and operational risk due to the failure of another settlement bank to pay.

In the new model, customers of each settlement bank will receive the dollar cash proceeds of a sale of securities from the moment that each transaction settles in EUI.

The settlement banks in turn are protected against the risks they take on each other through the process of settling in central bank money and have a more efficient and controlled settlement process.

EUI calculates settlement bank positions and instructs payments directly onto accounts at the Federal Reserve Bank of New York through its National Settlement Service. The ability of settlement banks to make the required payments in the Federal Reserve accounts is underpinned by funds held by the banks with the Bank of England.

This provides payment protection and certainty against the risk of intra-day insolvency events between settlement banks. John Trundle, CEO of Euroclear UK & Ireland commented: “We are extremely pleased to be able to offer this unique and path-breaking service through the Federal Reserve.”