FIA Expo 2023: Baton Systems CEO Outlines Vision for T+1 Settlement Using DLT

The FIA Futures & Options Expo, now in its 39th year, convened the listed derivatives dealers, thought industry leaders, and other stakeholders for two days of networking.

FinanceFeeds Interviews - FIA EXPO 2023

This fall, more than 3,000 industry attendees gathered at the Sheraton Grand Chicago Riverwalk to meet with the most innovative technology and service providers. Stuffed into two jam-packed days, attendees had the chance to engage in discussions and share ideas with industry experts about the most recent trends and advancements in futures and options trading.

FinanceFeeds Editor-in-Chief Nikolai Isayev sat down with Arjun Jayaram, CEO at Baton Systems, to discuss challenges and opportunities for the financial markets and the role of their respective offerings in the years ahead.

Nikolai Isayev started the conversation by noting that cross-border payments and collateral management are becoming increasingly important, and he acknowledged Baton Systems as a key player in this field, working with major banks like HSBC and BNY Mellon. He inquired about what success means for Baton at this stage.

Arjun Jayaram highlighted the importance of cross-border payments and collateral management. He explained that Baton Systems offers two distinct products in these areas: Core-FX™ for cross-border payments and Core-Collateral™ for collateral management in the derivatives space. Arjun mentioned that on the Core-Collateral side, they have established connections with 13 major Central Counterparties (CCPs) and also custody banks, to make asset mobilisation and visibility significantly faster He noted that large firms are now benefiting from the ability to achieve a 10-fold increase in their daily moves across the CCPs after using Baton Systems’ platform. On the Core-FX side, settlement processes that used to take 24-48 hours can now be completed in under three minutes, without introducing risk. This efficiency has been a game-changer in the industry.

Arjun Jayaram explained that Baton Systems serves nine of the largest banks, handling around $20 to $30 billion in asset value daily across currencies and securities. He highlighted their unique advantages such as providing the ability to orchestrate safe settlements across a universe of currencies that is effectively unlimited, and currently more than 50, in contrast to legacy PvP tools that are restricted to only 18 currencies.

The conversation then shifted to discuss how banks can use real-time data to optimize their processes, specifically in terms of liquidity management.

Arjun pointed out that many top-tier banks still rely on outdated processes, using the previous day’s balances and reconciling on a T+1 basis, which leads to assets remaining immobilized for about 24 hours. Baton Systems’ solution offers real-time connectivity to and visibility into all of a firm’s funding sources – their reserves, commitments, and obligations, even for large banks with numerous accounts and billions of dollars in daily operations. This rapid access allows for efficient asset mobilization.

Moreover, Baton Systems uses artificial intelligence and machine learning for just-in-time and real-time reconciliations, enabling banks to retrieve funds from clients quickly and reconcile and utilize those funds for future transactions. Their future goal is to incorporate predictive analytics to forecast liquidity positions with high accuracy, which is particularly valuable in high-interest rate environments where efficient asset mobilization is crucial for the market.

Nikolai Isayev mentioned that the FIA and other market participants are moving towards real-time processes, and he wondered if this shift is a logical step for everyone involved.

Arjun Jayaram agreed, arguing that the trend towards real-time is the current direction of the financial industry. He noted that relying on the previous day’s balances and margin requirements is no longer the norm. The ability to mobilize funds, both securities, and currencies, on demand and on a global scale is becoming imperative. As markets continue to evolve, the integration of tokens in specific corridors is making sense.

On a related note, we asked about the implications of T+1 settlement becoming a reality in everyday trading, particularly in equities and the FX landscape.

Arjun Jayaram further explained that the full impact of this change might not be entirely understood yet, but it’s expected to be significant. He gave a scenario to illustrate the potential effects: Consider an asset manager based in Hong Kong who, towards the end of the trading day, wants to purchase a financial product in US dollars but only has Chinese Offshore Renminbi (CNH). With traditional systems like CLS, immediate settlement in this scenario is challenging. However, solutions like Baton’s Core-FX enable real-time, riskless, payment-versus-payment (PvP) settlements for a huge range of currency pairs today, making this approach transformative for the trading world.

A noteworthy part of our interview occurred when Baton’s CEO provided detailed insights into the role of distributed ledger technology (DLT) in streamlining post-trade processes. We delved into whether DLT is an inevitable aspect of the future, particularly in light of the perspective that a technological revolution might not be imperative.

Arjun Jayaram acknowledged that while Baton Systems’ platform is built around DLT, it’s essential to approach DLT with practicality and discernment. He stressed that DLT is not a one-size-fits-all solution and shared examples of projects that unsuccessfully tried to force-fit DLT into unsuitable problems. In this regard, Arjun outlined three key characteristics that a problem should have for DLT to be a suitable solution:

  1. A truly distributed problem involving multiple stakeholders or principals. Using the example of a cleared derivative, there are buyers, sellers, exchanges, margining processes, and clients. All these entities need to be in sync.
  2. A distributed workflow by nature.
  3. A synchronized movement of assets.

When a problem possesses these characteristics, DLT has the potential to create significant breakthroughs, but it may not be suitable for all post-trade challenges. So, while some skeptics might have valid points, as not all problems are a fit for DLT when the right conditions are present, DLT can make a difference. These factors vie for attention as banks gear up for 24/7 trading, T+5 minute settlement, and the necessity to handle and settle the emerging realm of digital assets, which is now undeniably on the horizon.

A recurring question that seems to persist is whether one should build or buy a solution, whatever that solution might be tailored to. We asked how the CEO perceives this choice.

Arjun believes that the decision depends on what’s core to your business. He highlighted that for many financial institutions, certain elements are proprietary and may justify in-house development. However, when considering foundational infrastructure and connectivity tools, it’s often more practical to buy from specialized providers. To draw a parallel, he used the example of network routers, which banks typically buy from renowned providers like Cisco.

Arjun concluded that institutions should identify their core competencies and partner with specialized providers for areas outside of their core focus. For Baton Systems, their expertise lies in providing real-time asset visibility and swift asset mobilization, and they avoid areas like optimization, believing financial institutions are better equipped to handle them.