Best settlement initiative – Baton Systems

 

Settlement risk continues to rise in foreign exchange markets as the structures put in place more than two decades ago to settle FX transactions have neither been able to keep up with the surge of trading in emerging market (EM) currencies nor the expanding number of players active in the FX market.

Concerned with this development, the authors of the FX Global Code of Conduct explicitly called on market participants to put in place a robust and risk-mitigating process to promote the predictable and timely settlement of transactions in the FX market.

Even before this, Baton Systems had already made it its mission to open up the world of FX settlement. Through the use of distributed ledger technology, the Silicon Valley-based company is working to eliminate the friction currently found in the settlement of transactions in the foreign exchange market.

“The status quo is no longer an option,” says Arjun Jayaram, founder and chief executive of Baton Systems. “This is what the contributors to the Global Code are saying. We cannot sit back and say we will get to it at some point. It has to be now.”

“This call to action is unprecedented in the world of FX. There is a growing realisation that a lot of risk is building up and it needs to be mitigated.”

The firm swiftly set out to build on its settlement solution that – unlike the currently available Payment versus Payment (PvP) settlement system – offers a high degree of flexibility to the market. Simply put, any market participant in the FX market with a commercial bank account can access Baton’s solution, which offers real-time netting and payment strategies, and can settle any amount at any time of day, within three minutes, in a broad range of currencies.

“We offer market participants a very flexible bilateral PvP settlement and liquidity management solution,” Jayaram explains. “With our solution they have the choice of settling in real time with any counterparty, at a time that suits both parties across a broad range of currencies, with the funding source of their choice.”

In addition to opening its solution to a broad participant base, the settlement capacity of Baton’s platform extends to EM currencies where market participants currently have no outlet to settle safely
via PvP.

“These are the currencies where there’s considerable volatility, and growing volumes of activity, with very active central banks behind them all,” says Jayaram. “Emerging market currencies need a different solution that helps them deal with the liquidity problems, the risk and real-time constraints in settling. And we offer that.”

Where distributed ledger shines

Baton consciously chose distributed ledger technology as its backbone because the firm believed it provided the most reliable way to facilitate the settlement of obligations between counterparties, allowing participants to achieve settlement finality. 

“We have now built and deployed the technology to facilitate settlement on demand without tokenising money, by enabling the actual movement of real money sitting in real bank accounts,” highlights Jayaram. “Facilitating bilateral transactions and bilateral workflows is the true way in which distributed ledger technology shines. We don’t want to obfuscate the problem by creating and exchanging tokens.”

Through its choice of technology, supported by the application of a rule book that allows the settlement participants to achieve settlement finality, Baton believes it has cracked a very complex problem. It has done this with a solution that is truly scalable, resilient, secure and designed to interoperate with banks’ existing payment systems in the least intrusive manner.

The firm strategically decided to target tier one banks as its first clients and in so doing rigorously delivering its solutions in highly complex environments.

“The industry realises the need for safer and more robust settlement practices,” says Jayaram. “When the largest banks are enthusiastic about the opportunities opening up PvP could achieve and are actively helping companies like Baton to solve the problem, we know that change is inevitable.”

Baton Systems was voted best settlement initiative at the 2021 FX Markets e-FX Awards. 

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