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. Morgan wanted the clearing house to deal in settlement periods of one year; most of the other banks wanted to concentrate on two-year maturities.

"Other participants have been pushing the settlement period out, and we do not think it is feasible," said Jack Morris, a Morgan spokesman. "It makes the netting arrangement the guarantor for a longer period, instead of focusing on reducing risk."

Status Would Be Lost

Observers said that Morgan wanted to take advantage of its blue-chip status to give the bank a favored position with its counterparties.

Morgan's advantages would have been minimized in a clearing house focused on the riskier, longer-term contracts in which all participants would be treated equally, these sources said.

Once Morgan departed, Bankers Trust also pulled out, saying that the loss of such a large counterparty reduced the attractiveness of the project.

Morgan remains a member of the European Clearing House Organization, a group of about 20 banks, including Barclays, Midland Bank, Dresdner, and Banca Nationale del Lavoro, that are working on a multilateral system to be based in London.

"We're trying our best by the end of the year to get the two efforts together to create a global clearing house," said Garrett Glass, vice president in First Chicago's credit policy group.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.