Euroclear connects to Fed and increases settlement security

Fund managers transacting securities in dollars through Euroclear can now settle with the guarantee of the Federal Reserve.

Euroclear UK & Ireland said it had become the first foreign financial market infrastructure to connect to the Federal Reserve’s National Settlement Service, which means Euroclear clients can settle US dollar transactions in central bank money.

The central bank US dollar settlement model addresses certain credit and operational risks between settlement banks that existed in the previous commercial bank money model.

Customers of each settlement bank are assured that they will receive the dollar cash proceeds of a sale of securities and the settlement banks in turn are protected against risk they take when dealing with each other.

In the previous model where banks settled bilaterally at the end of the day, one settlement bank could be exposed to end-of-day credit and operational risk due to the failure of another settlement bank to pay.

John Trundle, chief executive of Euroclear UK & Ireland, said: “The connection to the National Settlement Service strengthens the robustness of US dollar settlement for our clients, provides greater visibility and efficiency of the settlement process, and a reduction in systemic risk. It is a great step forward for our industry.”