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25 Jan 22
CASE STUDY: FNALITY INTERNATIONAL
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FNALITY INTERNATIONAL PARTNERED WITH FNA TO HELP DESIGN THEIR NEW PAYMENT SYSTEM
AND QUANTIFY THE BENEFITS FOR THEIR PARTICIPANTS BY MEANS OF SIMULATION.
INTRODUCTION
Financial markets face unprecedented challenges. These challenges include
fragmented and inefficient post-trade processes, liquidity constraints and
complex and costly risk management.
To address these challenges, Fnality is developing a peer-to-peer payment system
underpinned by Distributed Ledger Technology (DLT). The new system will enable
quicker, safer, and more efficient exchange of value to the global wholesale
financial markets and bring multiple benefits to its participants, including
reduced counterparty and credit risk, reduced operational risk and efficient
liquidity management.
CHALLENGE
As a new and innovative payment system, Fnality needed to gain the trust and
confidence of central banks and regulators and prove its benefits to potential
participants. The company engaged FNA to help do so by building a series of
simulations to demonstrate the impact of the Fnality Payment System (FnPS)
across various cases.
Fnality chose FNA due to its industry-leading analytics technology, strong
reputation working with the world’s largest central banks and FMIs, and
significant experience designing, modelling and simulating payment systems.
Together, FNA and Fnality also share a philosophical alignment with a goal to
reduce operational risk and increase efficiency within the financial sector.
SOLUTION
Fnality’s first engagement with FNA began in 2019 with the development of the
FnPS simulator to use as a basis for real-time gross settlement (RTGS)
simulations. This was followed by the first major project, a Liquidity Impact
Analysis for wholesale payments in 2020.
In 2020, Fnality and FNA progressed to look at a second use case: Payments v
Payments (PvP), with the aim of showing interested central banks that the
inclusion of cross-border payments did not cause a significant elevation in
liquidity risk. In order to do so, FNA’s intricately connected multiple payments
data sources using cutting-edge models and technology.
Most recently, in 2021, FNA and Fnality worked on the Fnality Participant
Simulator to showcase the substantial benefits the FnPS offers to users. By
modelling payment trials and then consolidating them into the FnPS, the
simulation calculates the maximum possible benefits the FnPS could provide to
Fnality participants.
BENEFITS
1. Delivering confidence to regulators
There is a risk that liquidity needs could increase within legacy systems as a
consequence of banks migrating transactions to Fnality. FNA’s initial project
with Fnality used simulation technology to look at the liquidity impact for
wholesale payment use cases and revealed that if a participant migrated extreme
volumes of transactions to the FnPS ecosystem, liquidity requirements increased.
However, the simulation also discovered that relative increases in liquidity
tended to plateau depending on the FnPS utilisation levels by participants,
allowing Fnality to conclude that there were no significant increases in
liquidity requirements within existing RTGS systems -providing the comfort
required by regulators and participants that FnPS would not add any further risk
to the financial system.
2. Assessing the impact on liquidity
The second and more significant project saw FNA’s technology simulate five major
RTGS systems and PnPS counterparts to examine whether or not Fnality’s system
increased risk under normal and stressed scenarios. FNA also explored various
Liquidity Saving Mechanisms and their impact within the FnPS.
This analysis concluded that the implementation of the PvP use case alongside
the wholesale payments use case did not significantly affect liquidity
requirements within the FnPS or respective RTGS under counterparty stress
scenarios as well as normal circumstances. The analysis also demonstrated the
ability to effectively utilise LSMs across use cases.
3. Proving tangible benefits to members
The previous simulations delivered clear answers surrounding any potential
systemic risk posed by the FnPS. Next, Fnality wanted to understand the
potential impact and benefits for individual institutions when onboarding to
FnPS.
As a result, FNA and Fnality built the Fnality Participant Simulation – a
significantly more complex simulator that required input from multiple
stakeholders in order to establish how best to represent various complex
configurations, such as group entity structures and the migration of payment
rails.
The initial analysis revealed that when modelling the consolidation of multiple
and existing payment rails, a banking participant could reduce liquidity
requirements by up to 70% – equating to approximately $210m for a global
systemically important bank (G-SIB). The findings, therefore, suggest that the
effective use of the Fnality Global Payment System could lead to a significant
intraday liquidity requirement reduction and help reduce intraday liquidity
buffers.
Fnality and FNA are continuing their engagement to refine the simulations,
allowing the organisation to confidently prove the value of the FnPS to central
banks and participants, now and in the future, as Fnality expands the scope of
currencies and participants.
Fnality CEO, Rhomaios Ram, added:
“Since partnering with FNA in January 2020, Fnality has effectively explored how
Distributed Ledger Technology can be used to power a sophisticated peer-to-peer
payment system for central banks.
“Following on from the Global Financial Crisis, regulatory bodies across all
jurisdictions have imposed stricture regulatory measures to ensure financial
institutions are effectively managing their intraday liquidity risk. The
industry understands that any impediment to intraday liquidity flows could have
significant ramifications for the global financial system. And as we have seen
recently, the pandemic has compelled banks to assess their current intraday
liquidity management and stress-testing.
“At the same time, the digital disruption of legacy financial systems has
drastically enhanced the way capital and funds can be traded. Of the
technologies being integrated, blockchain is ideally placed to improve the
efficiency of intraday liquidity, from reducing funding costs and payment delays
to improved security.
” FNA has been integral to the development of the Fnality Payment System,
successfully running collaborative projects with Fnality to demonstrate the
disruptive advantages of DLT.
” As the Fnality Participant Simulator shows, blockchain solutions exist for
wholesale banks to significantly reduce funding costs. Beyond this, it ensures
that intraday liquidity management is keeping up with the rapid pace and scale
of daily transactions that are being facilitated through the latest fintech
innovations.
“We look forward to building our partnership with FNA in the Future”.
< Previous Next >
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LATEST NEWS & EVENTS:
The Payment Systems Broadcast Session #17
Read more >
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