Do we need to change thinking on value-date i.e. the date on which a transaction actually takes place? We’d love to hear your views.
Here at Fnality, we’re laying the foundations for a new payment system to deal with tokenised markets. Initially, it will operate in CAD, EUR, GBP, JPY and USD, creating a new settlement asset to allow on-chain payment. This has the potential to fundamentally change the way Payment versus Payment (PvP) and Delivery versus Payment (DvP) settlement works; real time, atomic, 365/24/7. Reduced counterpart and credit risk, improved liquidity management, possible 24/7 settlement; what’s not to like?
Well, as we debated what an operating day would look like in each of the currencies Fnality will operate in, a fundamental question came up;
In a 24/7 real time set up, what is the meaning of value-date? In fact, if we are unconstrained by batch processing and payment deadlines, would we even need an end of day and a value date?
One line of argument was that, in a new system, the concept of 'value-date' still needs to exist because:
- We need to know when to start and end the day, so we can avoid creditor preference, i.e. somebody saying” “You settled this on day X and not day X+1, which was detrimental to my client etc.".
- We need to be able to send an end-of-day-statement and be clear if obligations were met or not. A bank’s finance and/or operations control team needs time to do an end of day reconciliation based on a settlement/value date that they can rely on.
- We know that an auditor is going to want to send us a letter every January saying: “Please confirm the balances as at close of business on December 31st. 202x for legal entities a, b & c of XYZ Banking Group”.
- Existing regulation within most markets relies on a concept of settlement date, like Central Securities Depository regulation with its standard of T+2 settlement.
- Legacy processes and systems across banks and market infrastructures rely on existing value date standards. Changing these will be difficult. It creates confusion if some parts of the market adopt a new standard and others don’t; like changing sides of the road. So, you buy a security for value-date X, old system, if the funding is coming by FX, on a new standard. So far, our thinking has got us to: “there will be trouble if the two activities are not on the same standard”.
So, knowing that end-of-day for banks is roughly 21:00 locally, we concluded that ending the day and rolling the date at 21:00 locally was a good place to start.
We are not the only ones in the market to start considering this issue. In a recent paper, from the GFMA: First Steps Towards 24/7 FX Settlement Capabilities - Expanding Payment versus Payment (PvP) opportunities there is a suggestion of adopting universal value-date for FX trades, i.e. April 8th would mean the same 24hr period in every currency / country.
Which gets us to the thinking we would like to test. We are keen to push the boundaries of what is possible, but recognise that ideal is not always practical.
Would you help us check our thinking by sharing whether you agree / disagree on the following points:1. Regardless of whether a payment systems has the potential to operate on 24/7 basis, the concept of value-date and end-of-day will need to exist
Those who prefer can direct email to firstname.lastname@example.org