Summary Payment Systems Broadcast #26: Myths in Post-Trade FX

Insights

19 Nov

In session #26 of FNA’s Payment System Broadcast series, we took to myth-busting some common misconceptions surrounding post-trade settlement in wholesale FX markets with guests Dirk Bullmann, Managing Director for Public Policy, Strategy and Innovation at CLS, and Keith Bear, Fellow at the Cambridge Centre for Alternative Finance.

What does Atomic Settlement actually mean?

Few terms in finance are as overused and misunderstood as atomic settlement. As Dirk explained, the word’s roots go back to the Greek atomos, meaning “indivisible,” and in financial markets, it originally described the simultaneous exchange of assets across ledgers, “either it happens, or it doesn’t.”

But over time, “atomic” has become shorthand for several loosely related ideas—instant, simultaneous, single- or cross-ledger settlement, creating confusion about what innovation really entails. The distinction matters because these definitions underpin how new technologies, like distributed ledgers, are evaluated.

Keith added that DLT shows real promise when applied to tokenized assets, where both cash and securities exist on digital ledgers. “That’s when atomicity beings value,” he noted, though the benefits depend heavily on the use case. For example, digital bonds or tokenized private credit could gain from atomic exchange, while wholesale FX, still largely untokenized, may not.

The Liquidity Paradox of Instant Settlement

One of the session’s central myth-busting moments came with the claim that instant settlement automatically improves liquidity. As Keith clarified, the opposite is often true. With instant settlement, there is no room for netting; transactions must be funded individually, meaning “positions on either side of a transaction need to be pre-funded.”

Dirk reinforced that point from CLS’s vantage: each day, the firm settles around $8 trillion in FX transactions, equivalent to twice the UK’s annual GDP. Liquidity optimization, not speed, is what makes this possible. “Our system achieves up to 99% liquidity savings,” he said, highlighting that only 1% of funds are needed to settle the day’s trades, mainly because of netting.

Cross-Ledger Settlement: Technology Meets Governance

The conversation then turned to another misconception: that DLT can easily achieve atomicity across multiple ledgers. Both guests agreed that this remains largely aspirational.

Dirk explained that interoperability “goes beyond technology.” Even if synchronization tools or hash-time-lock contracts can technically link ledgers, practical settlement still depends on shared legal and operational frameworks. Keith described experiments by central banks, including the Bank of England’s Meridian initiative and the Swiss National Bank’s Project Helvetia, which explore synchronized or shared-ledger models. Yet trust, he said, remains the core barrier, particularly when central banks must rely on third-party operators for critical settlement infrastructure.

Decentralization doesn’t necessarily mean Resilience

The discussion also challenged another popular narrative, that decentralization automatically means higher resilience. While DLT’s distributed design can remove single points of failure, it introduces new vulnerabilities.

Keith pointed out that if multiple nodes rely on the same cloud provider, “a single outage, like the recent AWS failure, can still take everything offline.” He also noted that only a small fraction of blockchain codebases are “quantum-ready,” leaving them exposed to future cryptographic risks.

Dirk added that in highly regulated financial systems, decentralization can actually increase the attack surface, and confidentiality requirements often prevent full data mirroring across nodes. “Resilience is not just about architecture,” he said. “It’s about governance, continuity, and control.”

The Myth of Slow Traditional Finance

In perhaps the most familiar myth, the guests addressed the idea that traditional finance is slow and outdated. Settlement cycles, such as T+2 (trade date plus two business days), exist not because of technical limitations but due to operational coordination needs.

As Keith explained, these conventions give time for confirmation, collateral modelling, and funding across time zones. Moving from T+2 to T+1, as the US and Europe are now doing, requires broad industry coordination, not just faster tech.

FNA host, Carlos León, noted the contrast between retail and wholesale needs: consumers value instant finality, but large financial institutions care more about liquidity efficiency. As Dirk reminded listeners, “Two hundred years ago, settlement was T+14, by horse.” The technology for T+0 has long existed, but the constraints are economic and procedural, not digital.

Multiple Settlement Cycles offer a Middle Path

The broadcast concluded with a look at recent research by CLS and FNA, which explored the introduction of multiple settlement cycles per day. Simulation results showed that three daily cycles, aligned with Asia, Europe, and the Americas, could bring the same-day FX settlement business of up to $500 billion into the CLS system, reducing settlement risk while maintaining nearly all netting benefits.

“The efficiency loss was relatively small, around one percent,” Dirk said, “while the protection gains were significant.” The approach represents a pragmatic balance between CLS’s single funding and settlement window today and a controlled evolution rather than a leap of faith.

Keith added that as tokenization and wholesale CBDCs mature, these hybrid models could become the bridge between current systems and future architectures. “The technology’s trajectory,” he observed, “is one of gradual integration, not replacement.”

The Road Ahead

Session #26 of the Payment Systems Broadcast offered a reminder that when it comes to post-trade infrastructure, progress is not measured in speed alone. Each technological promise, from DLT to atomic settlement, must be weighed against liquidity efficiency, governance, and systemic resilience.

As Carlos closed the session, he framed the discussion aptly: The myths aren’t about technology, they’re about misunderstanding trade-offs. The future of settlement may well be faster, but its foundations will remain the same: trust, coordination, and balance.