FNA Papers Series: No. 4 | 2023

 

Written by: 

José Fernando Moreno Gutiérrez (FNA)

|  Dr Carlos León (FNA & Tilburg University)

Dr Kimmo Soramäki (FNA) 

 

León, C., Gutiérrez J., Soramäki K., (2023). Making Atomic Settlement Work in a Positive Interest Rate Environment. FNA Papers, No. 4- 2023, 10.69701/GJBJ662 [Available: https://fna.fi/insights/papers-4-making-atomic-settlment-work-in-positive-intereste-rate-environments]

 

In some cases, settling transactions instantaneously demands more liquidity, offering more risks than benefits, particularly in high interest-rate environments.

In this paper, Carlos LeónJosé Fernando Moreno Gutiérrez and Kimmo Soramäki explore atomic settlement and how it can be more liquidity-efficient in a positive interest rate environment through the deployment of smart algorithms to resequence payments before they are settled.

 

Abstract:

Under the concept of atomic settlement, the time between the trade and the settlement of transactions is reduced to a very small fraction of time (e.g., seconds or less), making them instantaneous. A second feature is the exchange of all the assets in the transaction in a single event, making them simultaneous — no delivery or payment occurs if the others do not occur too, commonly known as delivery versus payment (DvP) or payment versus payment (PvP). Making the settlement of the transaction instantaneous and simultaneous may have several benefits. It could effectively mitigate risks to all parties by guaranteeing the immediate and concurrent transfer of all assets in a transaction. By squeezing the transaction to its lowest time and space dimensions (i.e., its atom), some risks related to the settlement of transactions may be mitigated, e.g., replacement-cost risk.

However, making the settlement instantaneous and simultaneous only benefits some trading scenarios. In other scenarios, it will create higher liquidity requirements for the parties involved and increase settlement risk. This could be particularly burdensome in a positive interest rate environment. Therefore, notwithstanding its current allure, it is important to identify in which cases it makes no sense to settle atomically and how to make it work.

For those transactions that do not benefit from instantaneous and simultaneous settlement, we suggest not working on the smallest units (i.e., the atoms) but on the second smallest units (i.e., the molecules). We propose building an intermediate centralized layer between the trade and settlement layers that will use atoms (i.e. single transactions) to use smart algorithms to create molecules (i.e., sets of transactions) that make sense to settle from a liquidity-efficiency viewpoint. This way, more transactions will benefit from faster and concurrent transactions while avoiding high liquidity costs.

 

https://doi.org/10.69701/GJBJ662

Download the Paper > 

 

About the Authors:

 

Jose Fernando Moreno Gutiérrez

FNA | Jose.m@fna.fi

José Fernando Moreno Gutiérrez has a diverse work experience in the field of data science and financial analysis. José Fernando is currently working as a Senior Data Scientist at FNA since June 2022. Prior to this, they worked at Nemuru as a Lead Data Scientist from January 2021 to June 2022, and as a Senior Data Scientist from February 2019 to January 2021. Before joining Nemuru, they worked at Bluecap Management Consulting, where they held multiple roles including Project Lead from July 2018 to January 2019, Big Data Analyst from September 2017 to July 2018, and Data

LinkedIn >

 

Carlos León

FNA & Tilburg University | Carlos@fna.fi

Carlos is the Director of Financial Markets Infrastructures and Digital Currencies Solutions at FNA, where he is one of the subject matter experts on network analysis for payments and financial market infrastructures. He has worked as a Senior Researcher at the Central Bank of Colombia and as a Short-term Expert for the International Monetary Fund. Carlos has published 26 articles in Scopus-indexed peer-reviewed journals that have been cited in 133 Scopus-indexed academic publications. He holds an MSc in Banking and Finance from Université de Lausanne (Switzerland) and a PhD in Finance related to network analysis from Tilburg University (The Netherlands). 

LinkedIn > 

Kimmo Soramäki

FNA | kimmo@fna.fi

Kimmo Soramäki is the Founder and CEO of FNA and the author of “Network Theory and Financial Risk”. He has over 25 years of experience working with Central Banks and Financial Market Infrastructures. In 1997, Kimmo developed the world’s first simulation model for interbank payment systems – and since then, has been regularly invited to lead and contribute to simulation and payment system innovation projects with organisations like Bank of England, CLS, Payments Canada or SWIFT. He is a frequent speaker at industry events and has written over 50 articles that have been cited in more than 2000 academic publications. Kimmo has an MSc in Finance and a DSc in Operations Research, both from Aalto University (Finland).

 

 

 

 

More News

FNA’s Work Combatting Consumer Scams and Fraud Recognised at The RegTech Association Awards

FNA recently won the RegTech Association’s Chairman’s Award in recognition of FNA’s work in combatting consumer scams and fraud.    FNA received the award at the  #ACCELERATERegTechGlobal UK + Europe event, which took place at Australia House in London on Tuesday, 25th June. FNA’s Bimal Patel represented the company at the event.    The award […]

FNA Joins the Emerging Payments Association Asia

FNA is now a proud member of the Emerging Payments Association Asia.    The Emerging Payments Association Asia (EPAA) is a community of payment professionals who share a common goal of unifying the payments agenda in the region, accelerating business development and improving the regulatory landscape for organisations within the payments value chain.    FNA […]

FNA named Best Treasury Management Software Provider

For the second year running, FNA has been named ‘Best Treasury Management Software Solution Provider UK 2024’ by Global Banking & Finance Review.    The award recognises the impact of FNA’s Intelligent Liquidity Optimization (ILO) solution suite. FNA ILO is revolutionising liquidity management by leveraging the power of patented optimisation algorithms and network analytics, equipping […]
Copyright FNA © 2024 | Privacy Policy