Settling in central bank money takes the credit risk out of the cash leg of a trade. How it works between banks, who can reach it, and where a trading venue fits.
Settlement in central bank money means the cash leg of a trade moves between accounts held at the central bank, rather than between accounts at commercial banks. The receiving party ends up with a claim on the central bank, which issues the currency, instead of a claim on another institution.
That is why Principle 9 of the Principles for Financial Market Infrastructures asks market infrastructures to settle money in central bank money where practical and available. The safest money in the room.
Reserve accounts. Banks with access hold accounts at the central bank. A payment between two of them moves reserves from one account to the other.
Real time gross settlement. Large value payments run through the central bank’s RTGS system, which settles each payment individually and with finality as it is processed.
Settlement agents. Firms without their own account settle through a bank that has one. The money at the top of the chain is still central bank money, but the firm holds a claim on its agent until the payment is passed on.
A bond trade has two legs, the cash and the security, usually held in different systems run by different institutions. Delivery versus payment links them, so the security moves only if the cash moves, and the cash only if the security moves. When the cash leg settles in central bank money against the securities leg, neither party is exposed to the other for the time between the two movements. A settlement glossary.
Access to central bank money is granted by a central bank, currency by currency, under its own rules. No trading venue can grant it, and no venue should suggest that it does.
What a venue can do is be built so that, where its participants have access and the currency’s rail is enabled, the obligations it produces are ready to settle that way. IDBX is architected to support settlement in central bank money, with the securities leg coordinated through an integrated central securities system, so that both legs complete together or the trade does not settle. The Central Banking Rail.
Net obligations are computed as trades execute, inside each settlement set of the same rail, currency and date, which keeps the amount that has to move as small as the trades allow. Execution stage netting, explained.
Central bank money is not available to every participant, in every currency, at every hour. Operating hours, eligibility and the treatment of tokenized assets differ from one central bank to the next, and many trades will keep settling in commercial bank money for good reasons. IDBX is preparing for launch, and its pathway to central bank settlement depends on decisions that sit with central banks, not with IDBX.
What is central bank money?
A direct claim on the central bank, held by banks as reserves in their accounts at the central bank.
Why settle in central bank money?
The settlement asset carries no credit risk, so the receiving party is not exposed to a commercial bank once the payment has settled.
Who can settle in central bank money?
Institutions with an account at the central bank, and others through a settlement agent that has one.
Does IDBX settle in central bank money today?
No. IDBX is preparing for launch. It is architected to support settlement in central bank money where access is granted and the currency’s rail is enabled.
How does this relate to tokenized assets?
A tokenized instrument still needs a cash leg. A coordinated settlement window lets it settle against cash rather than around it. Tokenization.