Magazine article American Banker

Morgan and Bankers Trust Quit Foreign Exchange Plan

Magazine article American Banker

Morgan and Bankers Trust Quit Foreign Exchange Plan

Article excerpt

Morgan and Bankers Trust Quit Foreign Exchange Plan

J.P. Morgan & Co. and Bankers Trust New York Corp. have pulled out of an ambitious plan for a foreign-exhange clearing system headed by a group of North American banks.

As a result, the remaining institutions - Chase Manhattan Corp., First Chicago Corp., and the six major Canadian banks - may abandon plans to set up a separate clearing house in North America and may instead join forces with a group of European banks with similar aims.

The U.S.-Canadian project, called the North American Clearing House Organization, is aimed at establishing a clearing house with a central computer system that would calculate and apportion net payments among multiple trading partners at the end of each day. Banks would then pay a lump sum, instead of the many daily payments they currently make.

Multilateral Netting

The system is designed to reduce payment risk in the volatile multibillion-dollar-a-day foreign exchange market.

This settlement method, called a multilateral netting, has never been used on a large scale. Although most banks agree it would be desirable, there are many legal, operational, and logistical problems.

More common are bilateral netting arrangements, such as operated by a London-based bank consortium, FXNet, in which a bank has separate agreements with each of its major trading partners, and settles with each counterparty individually.

Disagreement Cited

Morgan dropped out of the multilateral netting project this summer, saying it disagreed with the group's focus on contracts with relatively long-term settlement maturities. …

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