Citi Launches Domestic Settlement Service for Interbank Forex Trades Colombia Now Live with Service
New York, Bogota, April 2, 2008 - Citi today announced the launch of its Domestic Settlement Service for interbank foreign exchange trades. Developed for use by Central Banks in developing markets, Citi's Domestic Settlement Service reduces settlement risk by simultaneously settling both sides of foreign exchange transactions. Cámara de Compensación de Divisas de Colombia, Colombia's Clearing House, is the first to launch Citi's service, successfully settling interbank foreign exchange trades for its members.
"With the rapid growth of high value foreign exchange trades, addressing interbank settlement risk is more significant than ever. Given Citi's settlement expertise, knowledge of local markets, and best-in-class infrastructure, our Domestic Settlement Service will help reduce settlement risk for banks in developing markets around the world," said Bharat Sarpeshkar, Managing Director, Global Head of Payments and Bank Solutions, Citi's Global Transaction Services business.
Foreign Exchange trades inherently have high settlement risk due to the two-sided nature of the contract, where a timing lag in payments can occur between participants. In this scenario one party can default before the funds are settled, leaving the other exposed to significant loss. Many countries operate payment infrastructures that lack the capability to support a settlement process where both sides of a trade are settled simultaneously. In contrast, Citi's Domestic Settlement Service provides the simultaneous settlement of both sides of a foreign exchange trade with netted payments, helping to mitigate settlement risk and enhance operational efficiencies. Citi intends to extend this capability to Central Banks interested in upgrading their foreign exchange settlement infrastructure. Citi was commended for this solution in The Banker's 2007 Technology Awards.
In Colombia, the Cámara de Compensación de Divisas, established in 2007 under the risk control initiative of Colombian Central Bank, Banco de la Republica, is now using Citi's Domestic Settlement Service to provide a simultaneous settlement process for US Dollar vs. Colombian Peso trades for same day settlement.
"Along the years we have provided innovative solutions for the Colombian financial market as a reflection of the strong commitment we have with the country. Through the Domestic Settlement Service we are granting Cámara de Compensación de Divisas a tool to foster transparency and efficiency in foreign exchange trades" explained Francisco Aristeguieta, President of Citibank Colombia.
"The exponential growth of FX transactions, and the expectation that this trend will continue in the future, led us to the conclusion that the Colombian settlement practices had to be strengthened and that a simultaneous settlement mechanism had to be implemented. The Central Bank led the process of inducing change and has monitored the risk mitigation arrangements agreed by market participants. The new mechanism offers a much more solid foundation for the dynamic FX market due to the safer, more sound, and more efficient environment it offers to the FX intermediaries and their customers," commented Joaquin Bernal, Manager of Banks Operations, Banco de la Republica.
"Colombia is one of the few markets where most trades are same-day settlement. After review, the Colombian financial sector chose Citi as its strategic partner and core service provider and has successfully launched simultaneous settlement in its currency market," commented Juan Camilo Gutierrez, General Manager, Cámara de Compensación de Divisas. "Close to 50 financial institutions will participate in Colombia's simultaneous settlement process in the next few months; the average daily trade volume in the market will surpass $1bn; and most spot transactions will be cleared and settled through the Clearing House by mid-2008. In addition to the benefits of risk reduction, our participants also value the 70% reduction in liquidity needed to settle a day's trading—enabling them to settle hundreds of trades with many counterparties with a single funds transfer."
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