OSTTRA launches FX PvP settlement powered by Baton Systems

OSTTRA and Baton Systems’ partnership represents a pivotal development in mitigating FX settlement risk, promising enhanced efficiency and safety in the FX market, which sees a daily turnover of US$2.2 trillion settled outside of CLS.

OSTTRA has announced the launch of a FX PvP (payment versus payment) settlement service powered by Baton Systems.

FX PvP settlement addresses the escalating Herstatt risk, as identified by major financial institutions like the BIS (Bank for International Settlements), the European Central Bank (ECB), and the Global Financial Markets Association (GFMA).

The service aims to enhance the security and efficiency of FX settlements, a concern heightened by the transition to T+1 settlement for securities in North America starting May 28, 2024.

OSTTRA plans to introduce settle-to-market to reduce capital requirements

OSTTRA, a global leader in post-trade solutions partially owned by CME Group and S&P Global, has also welcomed HSBC and Wells Fargo as the inaugural participants of the service aims to broaden FX settlement risk mitigation across the industry.

Leveraging Baton Systems’ advanced distributed ledger technology, OSTTRA’s FX PvP settlement service is designed to not only mitigate settlement risk but also optimize intraday funding, liquidity, and credit risk. It will be accessible to a wide range of market participants including banks, investment managers, and corporates.

This collaboration marks a significant step forward in OSTTRA’s strategy to enhance the structure of OTC markets. The firm has plans to eventually include settle-to-market functionality, significantly reducing derivative counterparty exposures, therefore reducing the regulatory capital required under SA-CCR (Standardised Approach to Counterparty Credit Risk).

Baton Systems supports the settlement of billions of dollars daily, with its systems having facilitated settlements exceeding $8.1 trillion to date.

The initiative comes in response to warnings from global financial institutions about the risks associated with FX settlement outside of traditional PvP platforms. The service specifically targets transactions not currently covered by CLS, aiming to include non-CLS eligible currencies and providing greater flexibility for intraday settlements.

“Post-trade efficiencies across OTC asset classes”

Mark Williamson, Global Head of FX & Commodities Partnerships & Propositions at HSBC, commented: “Since 2018, HSBC FX Everywhere has used Baton’s Core FX technology to settle 16 million FX trades across 13 different currencies totalling US$8.1 trillion. Using OSTTRA as a post-trade platform, the wider market will now be able to use the same technology to reduce their FX settlement risk through PvP settlement and compression, as well as optimising their cash flows. Overall, this will significantly mitigate Herstatt risk in the market.”

Chris Leaver, Chief Strategy and Marketing Officer at OSTTRA, added: “There’s huge scope for further post-trade efficiencies across OTC asset classes: this new service represents an important milestone in the evolution of our FX network, extending existing workflows to reduce settlement risk for thousands of OSTTRA clients. We’re excited to have chosen Baton as a partner in this first step of our journey – their proven technology leads the market in real-world, production DLT solutions for institutional capital markets”.

Arjun Jayaram, Founder and CEO of Baton Systems, added: “We’re excited to be collaborating with OSTTRA. OSTTRA is a leading player in the post-trade arena with extensive market reach. Through this strategic partnership, we will jointly accelerate and globally scale access to PvP settlement whilst enabling the Baton team to continue innovating and deploying operationally resilient solutions that deliver modern, cloud-based interoperable technology stacks that make our markets more inclusive, safer, and more efficient.”