Xchanging and Deutsche Bank Launch Netsett Settlement Engine for Insurers

The long-running Project Sorrento discussions in London finally bore fruit when Xchanging, and its project partners Deutsche Bank and ACORD, unveiled the Netsett multilateral netting and settlement engine for the global insurance market.

The ‘soft launch’ of the new platform, however, means that Netsett is unlikely to be fully rolled out until next year. It therefore came with a plea for brokers, carriers and others in the insurance and reinsurance sector to use the market utility once the netting and settlement engine becomes available in 2013.

As Max Pell, managing director of the London market business for Xchanging, explained at the press conference the pricing for the market utility is yet to be announced because each package will be sold to reflect the value created for participants. The idea of the ‘soft launch’ is obviously to get this process started and to attract users as quickly as possible, so that a virtuous circle of high volumes and consequently low prices can be established before the funding runs out. In this way the platform will work in a similar way to SWIFT’s payments messaging platform, with Xchanging obviously taking its cut as the operator.

“It’s a volume play we’re launching as want to establish a large global utility,” says Pell. “We’ve a very scalable platform that means as volumes rise, prices can fall as benchmarks are reached. Our intention is to be cheaper than the London bureau.” The new platform will operate on a subscription and transaction charging basis.

Preparing to Launch

Netsett is open standard and uses ACORD’s standardised insurance sector messaging technology, allied to Deutsche Bank’s clearing, netting and settlement engine capabilities. The latter will be the bank’s main contribution to the project, in addition to its foreign exchange (FX) services and optional value-adding cash management services.

A pilot phrase is now underway for Netsett with the RSA insurance group using the new platform for the remainder of the year to:

• Validate its business processes.
• Test the technology components and connectivity.
• Demonstrate the claimed benefits of straight-through processing (STP) enhanced operational efficiency, allied to reduced bank fees via increased netting, less working capital requirements, and so forth. Better transparency and control should also be key benefits as the platform can eliminate unallocated cash and the centralised ledger function. This should be particularly useful for treasurers, as it can provide matching information, analysis and forecasting, as well as an audit trail to aid compliance with the Solvency II capital adequacy rules for the insurance sector.
• Final pricing and commercial proposition. This will be finalised once the RSA pilot ends and Netsett is rolled out to the wider global market, outside of London, next year.

According to Pell, the London market processed £54bn last year but only £11bn actually moved because of netting. Netting off saves on bank transaction charges and inefficiencies, offering crucial benefits to corporate treasurers and businesses across all spectrums. “This happens in London at the moment and we want to make this global,” adds Pell, when discussing the purpose of the platform.

There are three key technology elements to the Netsett platform, covering:

• The messaging gateway: this relies on standardised ACORD messaging. Xchanging is neutral about how users plug-in to the platform and wants to make it as easy as possible, using standardised insurance sector messaging technology.
• Reference ledger: the in-built treasury features in the central ledger application let users instantly know their net position across all currencies and markets, claimed Pell. There is also an analytical capability to predict future positions.
• Settlement engine: this is provided by Deutsche Bank and is the firm’s key contribution to the venture. The bank will run and validate all netting processes and offer optional FX services and cash management value-added services. There is also an optional translation service to try to encourage the global take-up required to make this market utility work.

As Paul Duffy, director of capital markets and treasury solutions at Deutsche Bank, explained during the Q&A session: “We process something like $1.4 trillion to $1.5 trillion in payments every day so there should be no concerns about Deutsche Bank’s ability to deliver on the promise of this platform.”

All that is needed now is the volume and the users. It didn’t help that the presentational video broke down during the ‘soft launch’ this morning but that is the problem with all live technology, of course, and the partners involved from the operators Xchanging, to ACORD and Deutsche Bank are all long-standing players with well-established offerings and platforms. Next year will be the crucial test as we wait to see which players flock towards the hoped for global market utility.

Tim Yorke, the programme director at Xchanging, sums it up nicely. Skirting the pricing issue, he says that, of course, the firm is targeting brokers. “We need carriers to get brokers and vice versa, and we are talking to both, as we want both on our platform. There is no point having the only telephone in the world. This is a [planned] market utility that needs everyone.”