Microsoft got a wake-up call when the financial crisis hit in 2008: it had billions of dollars tied up in the FX trade settlement process with 15 financial counterparties. One or more of the counterparties might fail after Microsoft had delivered its side of a FX trade but before the company had been paid by the counterparty. It was a risk that had to be mitigated. And there was an obvious solution, called Continuous Linked Settlement, a special-purpose bank that Microsoft could access through a CLS member bank. CLS essentially settles trades using a payment-vs.-payment framework to mitigate counterparty settlement risk. There was one problem: CLS uses a netting logic that Microsoft’s existing systems couldn’t accommodate.
How were other companies that used CLS dealing with this problem? Microsoft’s team found others were using spreadsheets to calculate CLS net positions and reconcile FX activity manually. That wouldn’t work for Microsoft’s high volume of trading. They had to invent a systems solution that would be automatic.
So Microsoft’s team called in IT experts to brainstorm, reports cash planning manager Sunnie Ho. One solution was to create a module in SAP to convert the legacy netting report to CLS reports for file uploads, but that was too expensive. Another was for the company’s trading platform to customize its reporting functions to accommodate CLS and satisfy SAP standards. That wouldn’t work because that platform could not identify whether a trade is indeed settled through CLS. Instead, a hybrid solution was worked out that required a little modification by both SAP and Microsoft’s FX settlement platform, FXall.
“Using Microsoft’s trade information in FXall’s database, our solution generates net position reports for both CLS and non-CLS trades,”says Jayna Bundy, group manager of treasury operations. “The implementation of the solution allows CLS trades to be netted across all counterparties which follow CLS’ netting requirements, and it customizes reports to denote CLS as the counterparty name in order to conform to SAP’s strict formats and generate the right accounting entries.”
“Microsoft’s largest settlement risk was the delivery of currency to an approved counterparty and the subsequent failure of the counterparty to deliver the corresponding payment,” notes George Zinn, treasurer and corporate vice president. “This solution significantly mitigates this FX settlement risk. Ultimately, by increasing straight-through processing, efficiencies in our FX settlement space are obtained and operational costs decrease.”