Best settlement initiative: Baton Systems

 

When the Global Foreign Exchange Committee and other FX industry bodies sounded the alarm about the concerning volume of currency trading increasingly falling outside the settlement framework established under CLS more than two decades ago, Baton Systems was already building a fast and riskless settlement solution: a solution that would extend the benefits of payment versus payment (PvP) settlement and offer a high degree of choice and flexibility to the market.

That work led to the creation of Core‑FX, a platform that provides the opportunity for any market participant in the FX market with a commercial bank account to access and settle any currency in any amount on-demand at any time of day, every day, in a matter of minutes.

After three years of putting the Core‑FX platform through its paces, the platform was used for the first time in December 2021 to power interbank riskless settlements. HSBC and Wells Fargo reached an agreement to begin settling FX trades on a PvP basis, based on the Baton Systems rulebook, which provides legal definitions of settlement finality to be applied across the various jurisdictions where settlement takes place. Facilitated by the platform’s use of distributed ledger technology (DLT), the two banks can now net their bilateral payment obligations and settle them on a pre-agreed cadence multiple times a day.

“This was the first external PvP settlement taking place on the platform, and indeed the first non-CLS interbank PvP settlement of FX trades ever done,” says Alex Knight, head of Europe, Middle East and Africa at Baton Systems. Furthermore, this wasn’t a project or a proof of concept: Core‑FX is now being used to settle FX obligations on a daily basis in a production environment. Knight explains: “With large amounts of settlement risk still evident in the market, FX participants are now able to reduce their settlement risk with a fully configurable and automated netting solution that provides the safe settlement of those netted values in a manner absolutely consistent with the messages given out by the public bodies.”

While Baton’s platform has the potential to settle a large swath of the world’s currencies, the two banks have initially chosen to focus on a limited number: euros, pound sterling, and US and Canadian dollars. However, it’s expected that the scope of currencies being settled and the number of participants collaborating on the platform will expand considerably in the near future.

“We are already in conversation with most of the major market participants,” says Knight. “The validation that the market sees when two parties publicly declare that they are settling on a PvP basis using the Baton platform clearly drives interest to another level.

“Given its current progress, we feel that, over the course of the next few months, we’ll make significant inroads in terms of currency and counterparty roll-outs and are confident that the Core‑FX platform will become widely used by tier one banks and the wider market over the course of the next 12–18 months.”

Baton Systems is adamant that the technology at the heart of the platform is key to its rapid deployment. Indeed, Baton chose DLT as its backbone because the firm believes it provides the most reliable way to exchange money between counterparties within the construct of settlement finality. A shared permission ledger allows for market participants within the settlement system to easily share smart workflows to achieve their aims without the need to use tokens as is often associated with the technology.

“Because we’re using a shared permissioned ledger, we can deliver collaborative workflows that allow for netting, splitting and the actual PvP settlement process. The workflows lie at the heart of what we do as they work much like smart contracts.” Given that the solution is deployed on the cloud, it can be scaled quickly and efficiently and does not require heavy lifting to integrate into a market participant’s existing technology stack. To this end, DLT has been well received among participants that don’t want to have to rip out and replace their existing systems to benefit from the advantages Core‑FX offers, and Knight says that many are pleased to see a practical demonstration of the use of a relatively new technology process.

“As firms seek to change the way they orchestrate their payments and settlement, our solution is a practical way for firms to start using DLT in a way that brings immediate benefits that will help firms to prepare their broader business for future requirements.”

 

Baton Systems was voted Best settlement initiative at the 2022 FX Markets e-FX Awards.

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