One process that is ripe for digitization and automation is financial netting, a way to consolidate or reconcile multiple payments between two or more parties to create a single amount for each participant. It simplifies the process Companies and reduces the risk.
Banks do it. Securities, currencies, and other markets do. Service providers, central exchanges and clearing houses do this on behalf of these organizations. Netting can also be used for virtually any type of cross-company transaction, from reconciling AP / AR between two companies to resolving bankruptcy claims.
First, the 101 on the networkwhat is easiest to explain using an example. Party A is to receive $ 75,000 from Party B. At the same time, Party B should receive US $ 30,000 from Party A. Instead of paying Party B USD 75,000 to Party A and Party A USD 30,000 to Party B in two separate transactions (called gross settlement), the payments can be netted. That way, Party A owes nothing and Party B pays Party A $ 45,000.
Within an organization, standard business software can usually manage netting for things like transfers between business units or departments. For example, the netting process between two companies, banks or retailers and especially between several parties is more complex.
Proven advantages of a blockchain-based financial network solution
Working with existing customers, we’ve proven that using blockchain to streamline networks can do the following:
- Lower costs for all parties
- Reduce manual data entry and file uploading
- Automate and accelerate the processing of matching and netting transactions
- Increase security with encryption and tamper-proof distributed ledger technology
- Provide transparency and increase trust with authorized access to transaction data
Blockchain and the financial network: how it works
We have a replicable solution based on that Blockchain platform this transforms and simplifies netting between two or more parties. The heart of the solution is a Blockchain Network that serves as the sole source of truth and a permanent audit trail through immutable storage of transaction data. The engine that powers the solution is the automation that is activated by smart contracts and agreed business rules.
This is how it works. Participants send transaction data from their internal applications to the blockchain in real time in order to grant visibility to selected participants and no one else and to protect privacy in an environment in which multiple parties participate. This approach avoids errors caused by manual data entry processes and makes transactions available for faster netting. The actual processing is based on the time agreement between the participating parties.
Smart blockchain contracts encode and automate these agreements and can contain other business rules for transactions and relationships between parties, and even governance rules from regulators. Smart contracts can also contain the math instructions for the network itself, calculating who owes what to whom.
Foreign Exchange Netting: Revolutionizing Post-Trade Processing
CLS, a financial market infrastructure for settlement, processing and data solutions, worked with blockchain to develop their blockchain CLSNet Solution for the foreign exchange market. In production for more than two years, CLSNet is a standardized, automated bilateral payment network settlement service for approximately 120 currencies that is not covered by the CLS FX settlement service.
Without CLSNet, companies that trade in the foreign exchange market and want to network with one another use processes that are largely manual and not fully standardized or scalable. Alternatively, gross settlement requires participants to settle transaction by transaction, which requires more daily liquidity and incurs higher costs due to more frequent payments over the Swift network.
With CLSNet, considered the first global FX market application to run in production on blockchain, participants on the buy and sell side send their trading instructions to the platform. CLSNet complies with instructions and sends a match notification to each counterparty which serves as legal confirmation of the underlying forex trade. Participants then assign a cut-off time for each currency. When this time is reached, you will receive a report of your net payment amounts. Payment is delivered outside of CLSNet using instructions sent over the SWIFT network.
CLSNet uses blockchain as an immutable, verifiable record of all transactions, as well as intelligent contracts to standardize and automate netting, and helps buyers and sellers to increase the efficiency of operational processes, e.g. B. to optimize intraday liquidity, to recognize the awareness of currencies and counterparties in real time and to reduce risk.
Use of the blockchain to offset interbank cash transactions
It’s not uncommon for banks in one city to run out of cash and require little cash to fill ATMs in another city. Moving cash physically from one city to another is expensive and requires, among other things, armored car transport, possibly air transport, and insurance. Another option is to ask the central bank to borrow the excess money in one city and place cash in the other city. However, this is also an expensive alternative.
A third option is now available from Blockchain Cooperation with TecBan (Tecnologia Bancária S.A.), Brazil’s largest ATM network operator and leading specialist in managing the money cycle through self-service solutions and bank sharing. The company offers a blockchain-based service that allows banks to optimize the availability of money in their branches, which are spread across multiple cities, through interbank money transfers.
The TecBan solution, based on the Blockchain Platform and cloudprovides an automated application that takes into account cash needs and cash availability between banks. The netting of interbank transactions is also handled in the blockchain network without manual processes. All that is required is a custody transfer and the money is “moved” from one bank to another within a shared TecBan vault in or near the city closest to the ATM.
The main benefit for banks is lowering the cost of cash logistics. For TecBan, blockchain technology has enabled the company to offer member banks a new, more efficient and cost-saving service.
Financial networks and blockchain in your industry: Build on our experience and resources
These financial network solutions are replicable. By that I mean that we have already created it for existing customers and can quickly re-create the solution for other companies and their partners. Assets such as matching rules and logic for calculations, templates for user interfaces and APIs for connecting trading systems or recording systems can be adapted for use in each system Industry Transaction network required.
By leveraging an existing customizable solution and the expertise of Blockchain servicesCompanies can move from design to pilot in just three months. After you’ve applied the pilot learning to hardening the infrastructure, you can start scaling up by adding new participants to the network.
The solution itself is based on the blockchain platform, a commercial value-added distribution of open source from the Linux Foundation Hyperledger fabric. The blockchain platform is cloud-independent and can therefore be run in the cloud of your choice or locally. Each party in the blockchain network can manage their data in the IT infrastructure or a third-party cloud provider of their choice. The platform is GDPR compliant and therefore ready to support global business relationships.
Our customers are finding that a blockchain network created for a business application such as financial networks provides a platform for automating other business processes or offering new services to their customers.
If you’re at a company looking for a better way to manage networks between companies, consider blockchain. It deals with data protection and compliance, can be scaled to handle very high volume workflows, and provides an immutable audit trail. Blockchain Services can help you either join the CLSNet or TechBahn solutions described in this article, or you can talk to us about how we can replicate a similar blockchain-based network solution for your business.
This Use case Following the story of financial netting, there will be more examples of how blockchain services are used in various industries to solve real-world problems. Be sure to read our latest articles about Invoice reconciliation and Digital ticketing and upcoming articles or schedule a free private lesson consultation to find out how you can benefit from this solution.