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Global ‘Just-in-Time’ Liquidity Network Nearing Completion

Published  6 MIN READ

“As we become increasingly used to interacting on a real-time or instant basis, it’s obvious that the international payments system is nowhere near fit for purpose in today’s global digital economy,” states Nick Ogden, serial fintech entrepreneur, founder of WorldPay, ClearBank and now the RTGS.global network.

Working with regulators, central banks and commercial institutions, Ogden has turned words into action using his new venture to create the RTGS.global network. This, he says, will ensure that every bilateral international transaction is matched to corresponding real-time institutional liquidity. He calls it ‘liquidity versus liquidity’ or LVL.

The platform enables almost instant settlement across both commercial and central banks, validating the exchange of funds between banks, based on the real-time availability of liquidity. Ogden says LVL will “transform” international payments and a broad sweep of other transactions, including securities and derivatives. 

With interbank liquidity visible for the first time, settlement and counterparty credit risk is removed. With no need to pre-fund a nostro account, and with 24/7/365 availability, the end-customer can, says Ogden, expect “dramatically improving commercial cash flows”.

The RTGS.global network has been developed in collaboration with Microsoft, using Azure cloud services. It removes many manual processes for banks. In doing so, he says, it takes real-time domestic gross settlement  processes to a global level, “delivering instant transactional integrity, security, risk reduction and settlement finality”.

Total liquidity

Ogden recalls that when he was planning ClearBank in 2014, he wanted to create an institution from the ground up, using the latest technologies. Cloud became a huge part of the design rationale, although at the time it was in nascent form.

Following a successful request to the Bank of England (BoE) to have identical capacities and capabilities as the UK’s other CMA9 banks, a level playing field was created from the outset for ClearBank’s regulated customers, all of which are financial institutions.

This enables it to keep all cash deposits whole, rather than leverage those deposits and become a net interest margin (NIM) bank. As a 100% liquid bank, with liquidity sitting in a BoE reserve account, every customer request supported by sufficient liquidity can be processed.

After stepping down as Executive Chair of ClearBank in 2018, Ogden wanted to repurpose this concept to resolve issues with the existing archaic liquidity mechanism. “We thought that if we could develop a platform that can see central bank deposits, and then create synthetic accounts in which users earmark funds for transactional requests through their core banking system, we’d mitigate settlement risk.”

Under the hood

Andrew Smith, CTO and co-founder of of the RTGS.global network, and co-founder ClearBank, explains the process.

Each commercial bank on the platform has a ‘synthetic’ reserve account with the central banks across its network. In transacting with a partner bank on the platform, a commercial bank will simply move funds from one liquidity pool to another in the currency required.

Charges may apply, but the amount transacted is always the amount to be received in the destination account. With the platform able to confirm sufficient liquidity for a specific transaction, an indicative interbank exchange rate (updated every 60 seconds) is provided by the partner bank.

When the transaction is approved, the platform’s patent pending (in 150 countries) liquidity ‘lock, lock and block’ system kicks in. This holds the required liquidity in the two counterparty banks’ reserve accounts, sending a ‘liquidity block’ message to the respective central bank to notify and complete the transaction. The whole process takes a fraction of a second, enabling near real-time, bilateral settlement.

With full visibility across the network, each central bank is able to see beneficial ownership of funds allocated by a commercial bank to cover outgoing transactions to commercial banking counterparties. When the transaction is triggered, the platform adjusts respective liquidity pools, in respective currencies, in real time. 

In 2019, Ogden went back to the BoE. With the success of ClearBank fresh in mind, the BoE appreciated the concept of shifting the risk-weighted asset of commercial bank money into a new type of account that references central bank reserve accounts of commercial banks. This would mean cross-currency settlement risk (also known as Herstatt risk) and other risks would be diminished.    

With the BoE recognising the potential benefits of instantaneous settlement between these accounts, and instant validation of available liquidity, Ogden’s team presented successfully to 44 other regulators globally.

Buoyed by positive reception of the idea by regulators globally, RTGS.global set about building the platform, working with ClearBank technology partner, Microsoft, and its Azure cloud service to achieve “atomic settlement”. This is where almost algo-trading transaction speeds are attained. Initial trials managed a 300-millisecond round trip. In 2020, a test transaction between New York and Sydney achieved 50-milliseconds.

Corporate advantage

Transaction speeds of this nature effectively provide “just-in-time liquidity”, says Smith. For corporates, this means no settlement window and no transaction value limitation.

With banks able to source liquidity in real time, they don’t necessarily need warning of when a corporate transaction needs to take place. “The corporate treasurer can, therefore, manage their exposures and liquidity down to the minute, sourcing it from their bank and executing immediately,” explains Smith.

Being instant, it ends the need for status messages flowing across the correspondent banking system just to track transaction progress. With the chain much-simplified, multiple bank fee deductions end too. Such a mechanism could remove some of what the World Bank and the International Monetary Fund (IMF) estimate to be an annual $15tr. burden on the industry, paid in friction costs in relation to money flows.

RTGS.global has plans to make this process even easier for corporates. A series of secure and configurable network connectors that can be issued and in production in various environments “in ten minutes”, via the Azure marketplace, enable banks to connect to the platform, integrating services either via open application programming interfaces (APIs) or via Azure’s Event Grid connectivity.

The same connectors will soon be offered to corporates, giving access to the global network, and direct connectivity with their banks, says Smith. “It will enable corporates to trigger just-in-time liquidity transfers for the purpose of their own transactions.”

The platform focus is LVL, but it also enables ‘smart data’ to be attached and flow with every transaction. This can occur between the banks, and also between the two corporate counterparties. For corporates, line-item data, including part numbers and stock keeping units (SKUs), will facilitate automated reconciliation, says Smith. Data fields are neither limited nor format-restricted, enabling each buyer and supplier relationship to establish its own data schema, he adds.

With the regulators connected to the network, transactional data associated with liquidity movement can be routed for their approval. Where exchange controls exist, this serves to minimise the bureaucracy normally experienced, says Ogden. Discussions with the People’s Bank of China and the Reserve Bank of India, for example, are already in place permitting discussions with the two domestic commercial banks to pursue this route.

Coming soon

The LVL technology stack has been deployed globally within Azure cloud. A number of “value-added services”, with the provision of third-party solutions, including tools to tackle financial crime, are on the roadmap for 2022, Ogden reports. Integrations with several core banking system vendors and infrastructure providers is underway, the aim being to make RTGS.global a standard upgrade.

For it to be successful, RTGS.global must build out its network. It is currently working with PwC and Microsoft with a view to introducing “this new way of dealing with liquidity” to the world’s systemic banks, says Ogden.

While trade finance, foreign exchange (FX), and securities are the current areas of commercial banking interest, proposals have been put forward to use the platform as a domestic payment rail. It has also been suggested as a solution where intra-regional payments friction occurs, such as in the Caribbean where a national real-time gross settlement platform is not used.

With commercial bank user-groups in sandbox mode, and a panel of industry experts (including central bank regulators and treasury committee members) already offering developmental feedback, he hopes to have live commercial bank users on the platform by the end of 2021. Corporate clients of those banks should be able to connect to the platform in 2022.