Cobalt’s dynamic credit report - a watershed moment for FX trading.

Cobalt, a provider of critical risk and data services to the Foreign Exchange and Digital Asset market have recently revealed the results of their dynamic credit pilot, carried out with seven major global FX banks across ten trading venues over the past few months.

Cobalt wanted to demonstrate how their distributed ledger technology (DLT) system could solve one of the FX industry’s big issues – the ability to make dynamic credit truly dynamic. Via Cobalt, both aggregation and netting is handled which reduces the number of transactions that need to be settled and eliminates errors such as data duplication. Using production trade data from each participating execution venue, the aim was to show how credit can be managed more effectively.

Post trade settlement reconciliation in the FX industry is notoriously slow. This is because the manual processes employed in legacy systems can introduce errors which then causes delays and increases back office costs. Post trade delays then have a knock on effect on credit management.

Existing credit management has been an industry bottleneck issue and often fails to meet the FX industry’s own Global Code guidelines as it lacks market access control and delivers poor return on equity (ROE).  As a result, understanding true exposure or the full appetite of the market can be difficult.  Credit limits get updated locally and rely solely on trades executed at that specific venue. Local credit management utilise tools for adding, updating and removing credit which increases the administrative burden on credit providers.

The results of the pilot are exciting, showing that credit utilisation could be reduced by more than 50%. From one weeks’ worth of data there was a 47% reduction in the utilisation of credit with one highly active bank achieving a 60% reduction. These results prove Cobalt’s case and mean over allocation of credit can be addressed and credit officers need only worry about their global limits, freeing traders to do more deals.

Possibly a watershed moment for the modern foreign exchange industry, Cobalt’s pilot demonstrates that the technology to ease the credit bottleneck has not only been developed but it has been proven to work.