BIS and Bank of England Partner on FX Settlements

The Bank for International Settlements (BIS) Innovation Hub, in collaboration with the Eurosystem and the Bank of England, has launched Project Meridian FX. This initiative aims to enhance the settlement process for foreign exchange (FX) transactions by leveraging advanced technologies, particularly real-time gross settlement (RTGS) systems and distributed ledger technology (DLT).

Project Meridian FX builds upon the initial findings of Project Meridian, which introduced the concept of the “synchronization operator” (SO). The SO functions as an intermediary, facilitating synchronized settlement of payment versus payment (PvP) transactions across different RTGS systems and DLT platforms. By focusing on FX transactions, Project Meridian FX aims to address the longstanding challenges associated with settling FX trades, such as high costs, significant risks, and time inefficiencies in cross-border transactions.

The primary objective of Project Meridian FX is to test the usability of the SO across various asset types and technological platforms. The project will explore additional features that could be integrated into the SO to help reduce the liquidity needs of participants. The overarching goal is to enhance the interoperability between existing RTGS systems and new payment technologies, including DLT.

To achieve these objectives, Project Meridian FX will conduct experiments towards the end of 2024. These experiments will involve connecting the SO to three solutions being explored as part of the Eurosystem’s broader exploratory work on wholesale settlement:

• The Trigger Solution developed by Deutsche Bundesbank.
• The TIPS Hash-Link developed by Banca d’Italia.
• The DL3S DLT Interoperability Solution developed by Banque de France.

These trials aim to test how the SO can facilitate interoperability and orchestrate the settlement of PvP FX transactions between different jurisdictions and technological platforms.

One of the key areas of exploration within Project Meridian FX is the synchronization of FX transactions to mitigate the liquidity requirements for participants. This initiative is particularly significant given the enormous scale of FX settlement risks. In April 2022, these risks amounted to $2.2 trillion daily, with the UK having the largest exposure.

By enabling interoperability between RTGS systems and DLT-based platforms, Project Meridian FX aims to offer potential solutions to the challenges in settling FX trades. These solutions could lead to more innovative and efficient settlement services for a broader spectrum of assets settled in central bank money.

The experiments under Project Meridian FX are scheduled to commence in late 2024, with the project expected to report its findings in Spring 2025. The outcomes of this initiative could pave the way for more efficient and secure cross-border FX settlements, significantly impacting the global financial ecosystem.

The broader implications of Project Meridian FX are substantial. By providing insights into how RTGS system operators can enable interoperability with emerging payment technologies, the project could unlock new opportunities for the synchronization model. This model has the potential to revolutionize the settlement services landscape, making it more efficient and innovative.