Euroclear UK & Ireland say ‘auf Wiedersehen’ to US dollar Herstatt risk

Earlier this month, Euroclear UK & Ireland (EUI) issued a consultation to participants concerning their proposals to enhance the US dollar settlement arrangements in the CREST system, and make relevant changes to CREST documentation.Thomas Murray wholeheartedly supports these proposals.

EUI is the central securities depository (‘CSD’) of the United Kingdom, Ireland, Jersey, Guernsey and the Isle of Man. EUI owns and operates the CREST system that provides the central settlement service for equities, debt, and other instruments in the UK and Irish markets. CREST enables the holding and transfer of securities in an uncertificated form, the electronic transfer of title, delivery versus payment (‘DvP’) in central bank money, and the dematerialisation of money market instruments. The CREST system settles all types of instruments (equities, government debt, corporate debt, and money market instruments) against sterling, euros or dollars.

CREST provides settlement throughout the day in near real-time on a gross irrevocable basis, with DvP for sterling, euros, and dollars. Payments in sterling and euros are made in central bank money. In contrast, however, US dollar payment arrangements are currently in commercial bank money. The effect is that CREST settlement banks using EUI’s US dollar service still have intra-day bilateral inter-bank credit risk exposure, in that they are vulnerable to intra-day failure of their counterparty’s settlement bank.

EUI is proposing to mitigate US dollar settlement risk by moving from the current bilateral commercial bank US dollar payments model to a CSDR-compliant centralised, multilateral payments model, using the US Federal Reserve-operated National Settlement Service (NSS) as underpinned by sterling funds in central bank money.

Thomas Murray joins many stakeholders in considering the current arrangement a risk to clients and welcomes EUI’s acknowledgement that the CREST system does not fully comply with CPMI-IOSCO PFMI and CSDR requirements.

Thomas Murray is an independent financial data, analytical and advisory firm which assesses capital markets and post-trade risks relating to financial market infrastructures. It has put in considerable work on global interbank payment systems, on behalf of banks and institutional investors, for over 20 years. We directly assess CSDs in relation to a range of key risks, including settlement, credit, and liquidity risks. We have also worked closely with CSDs in adapting to the new regulatory environment laid out by CSDR, implementation of T2S, and in conforming to the CPMI-ISOCO Principles for Financial Market Infrastructures.

The changes from EUI reduce settlement risk by removing credit risk and minimising liquidity risks, strengthen the robustness of US Dollar settlement for CREST participants, and improve the visibility and monitoring of the settlement process. In addition, proposed changes to CREST Rules will require European participants to meet higher requirements before membership can be accepted in the new service in order to meet US Federal Reserve Bank requirements.

When EUI published its self-assessment against the CMPI-IOSCO PFMIs in November 2016, it acknowledged that it only broadly observed principles relating to credit risk, liquidity risk and money settlement. This was because of CREST’s USD payment arrangements operating on an assured payment basis, with obligations between settlement banks being discharged on a bilateral net basis outside the CREST system. The self-assessment also promised implementation of a robust central bank money based model for USD payments in 2017.


Thomas Murray salutes this consultation. Developments are underway to enhance US dollar settlement arrangements, not least because EUI, as one of the few international CSDs in the world, is leading the way in reducing payment risk. Also EUI are giving credibility to the PFMI self-assessment process, of which Thomas Murray have been a supporter of, and adviser to, since 2011. FMIs take note!


Author - Archibald AI. Innes, Associate, Thomas Murray Data Services