Transforming post-trade process: Interview with Alex Knight, Head of EMEA at Baton Systems
By Edlyn Cardoza
After a trade is complete, the process of post-trade occurs. In this process, the buyer and seller compare trade details, approve the transaction, change ownership records, and arrange for the transfer of cash and securities. The post-trade process is vital in the market that is not standardised, such as the OTC (over-the-counter) markets.
Post-trade processing is necessary, as it verifies the specifics of a transaction. Prices and markets move fast, several securities trades take place over the phone, growing trades are performed at high frequency by computers only, and the room for small mistakes is high. Post-trade processing permits the seller and buyer of securities to root out and rectify any errors.
Baton Systems is one such company that is transforming the entire front-to-back post-trade process, introducing interoperable digital market infrastructures with the power, intelligence, and security of 21st-century technology. Their interoperable, rules-based distributed ledger is a fast, secure platform for riskless cash and securities settlement. Empowering financial institutions to take control, Baton is redefining what post-trade processing should look like: fully connected, friction-free, flexible, and transparent.
In conversation with Alex Knight, Head of EMEA at Baton Systems, IBS Intelligence learns more about post-trading process of assets and payments, and its modernisation in 2022.
Q1) How does Baton Systems provide a fast, secure platform for the post-trade processing of assets and wholesale payments?
Baton is transforming the post-trade processes that, as an industry, we’ve come to accept as the status quo. We are working with some of the world’s largest financial institutions, enabling them to move on from their existing reality, which is generally characterised by server-based, hard-wired inflexible infrastructures that consume vast amounts of financial and human resources so they can introduce fully connected, digital market infrastructures. In doing so, we empower firms to automate and streamline the entire process from trade matching to settlement.
Our Core-FX solution has been built using interoperable distributed ledger technology (DLT), allowing firms to digitally enrich their legacy infrastructure and achieve zero-friction settlements and payments without immediately ripping and replacing existing infrastructure.
As a result, Core-FX enables financial institutions to securely settle FX trades with a solution that offers flexibility, transparency, security, resiliency and immutability, along with automation and collaboration.
Q2) Recently, Baton Systems announced the first interbank PvP settlement outside CLS. How does Baton Systems help the two banks settle FX trades?
Core-FX enables firms to settle their FX trades with PvP protection irrespective of what currency these trades happen to be in. Doing so allows banks to meet their commitments to the recently updated FX Global Code more effectively by eliminating settlement risk across a broader range of FX transactions whilst simultaneously improving how they can manage their intraday liquidity and funding requirements.
Adopters of this technology can access real-time netting and payment strategies. The settlement participants can agree amongst themselves at what time and how often they settle – this means they can settle multiple times a day and align the settlements to support their funding profile better.
By agreeing to the Baton Rule Book, the participants can achieve settlement finality and complete the whole settlement process in under 3 minutes.
Q3) What does your Distributed Ledger Technology offer clients?
Our DLT solution allows settlement participants to collaborate and securely communicate all information relating to the underlying transactions, including how they will be netted and settled.
All interactions take place in real-time and are only visible to the trade principles. Furthermore, every action is acknowledged, encrypted and notarised and as the information can’t be tampered with, it becomes an irrefutable fact.
With this approach, the participants have complete visibility of all activities, providing a level of transparency unachievable with the traditional bilateral settlement. By implementing collaborative workflows alongside real-time shared data, assets can be moved synchronised and orchestrated using automated rules, increasing efficiency and control.
Additionally, our rules-based ledger interoperates seamlessly with the core ledgers, payment gateways and messaging systems that the bank already has in place, using secure access protocols, adapters and APIs.
Q4) How does Baton Systems ensure riskless settlement?
Our Core-FX solution allows firms to settle their trades on a payment versus payment (PvP) basis. When trades are settled in this way, the currencies are exchanged simultaneously with this change of ownership orchestrated and reflected on the Baton ledger. This removes the possibility of the firm on one side of the trade making their payment to a counterparty that then defaults on their obligations. In the absence of PvP, settlement participants need to rely on bilateral settlement processes, which leave the first party that makes a payment massively exposed. Core-FX does not require the creation of tokens; it uses real accounts at commercial banks, is available to all market participants and can be extended to any currency.
Q5) With the FX industry being prevalent with opportunities for modernisation, in what ways, according to you, will it modernise in 2022?
The FX market has witnessed considerable change over recent years – in part due to ever-increasing trading volumes, especially in emerging market currencies, and the simultaneous decline in sales and trading yields. While the past focus has been on optimising and streamlining front-office technology, the spotlight is now moving towards the post-trade space.
Many firms now have an opportunity to build out their post-trade FX infrastructure, so it comprises fully-connected, friction-free and transparent workflows. In doing so, actively addressing the multiple risks and financial challenges the business faces today and building the bank they will need in coming years to effectively process and settle the expanding universe of digital assets, including CBDCs and Stablecoins now on the horizon. The technology now exists to implement these changes, and with increasing regulatory focus on settlement risk and intraday liquidity management, there are even greater incentives to take advantage of it.
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