DLT allows for first interbank riskless settlement outside of CLS

The move marks a change in FX settlements, allowing market participants to significantly reduce their settlement exposure and associated risks.

By Wesley Bray

HSBS and Wells Fargo have announced the first interbank payment vs payment (PvP) settlement outside of CLS, using Baton Systems’ Core-FX solution, which is built on its proprietary distributed ledger technology (DLT) and governed by the Baton Rulebook.

Both banks are using the platform to collaboratively settle FX trades bilaterally on demand on a PvP basis in less than three minutes, using real currencies and accounts.

According to Baton Systems, all currencies, including emerging market currencies, which are currently ineligible for PvP settlement in CLS, can now be securely settled using DLT, which provides increased flexibility and complete transparency.

In addition, the solution allows both banks to net in an efficient manner, choose what time to settle and in which currencies, which allows for settlement risks and FX processing costs to be reduced.

Aligned with an enhanced regulatory focus on expanding and extending riskless settlement more broadly across the market, Baton Systems claims that its PvP solution empowers market participants to take direct control of their settlement cycles, settle multiple times a day, and streamline workflows, resulting in significant improvements to their liquidity, funding, risk and credit management. 

Baton Systems said this new technology provides an alternative to a market which was previously restricted by batch-based processes and limited PvP access at both a participant and currency level.

“This development is hugely significant for the entire FX market, as it offers firms the opportunity to really address settlement risk – arguably the most critical control issue impacting post-trade today,” said Arjun Jayaram, chief executive and founder of Baton Systems.

“Today’s announcement demonstrates the tremendous potential this technology presents to FX market participants globally to improve their risk management, intraday liquidity controls and funding profiles. Using proven technology that is readily available today, banks can now take control and completely revolutionise their entire post-trade process from trade-capture through to settlement.” 

In September this year, CLS announced that it would conduct a pilot of its CLSNet solution with 12 banks to evaluate potential (PvP) solutions for currencies that are not currently eligible for CLSSettlement.

Originally launched in 2018, CLSNet currently allows for the netting of FX transactions in 120 lesser used currencies. CLSNet is powered by the blockchain but does not use DLT.