Baton Claims World First with Non-CLS PvP Settlement

The world’s first interbank Payment vs Payment (PvP) settlement outside of CLS has been completed using HSBC’s FX Everywhere solution, which runs on Baton Systems’ Core-FX solution, that uses proprietary distributed ledger technology (DLT) and is governed by the Baton Rulebook.

HSBC and Wells Fargo have ushered in what Baton says the threshold of a new era in FX settlements, using the platform to collaboratively settle FX trades bilaterally on demand using real currencies in real accounts, in less than three minutes, on a PvP basis with legal settlement finality. The solution enables the firms to net in an efficient manner, choose what time to settle and in which currencies, all on a PvP basis – thus reducing settlement risks and FX processing costs.

The banks will jointly use a shared settlement ledger to process US dollar, Canadian dollar, sterling and euro transactions and say they have plans to extend the platform to settle additional currencies in the near future.

“We are pleased to announce that we will be utilizing blockchain technology for the first time in the settlement process of cross-border payments,” says Mark Jones, co-head of macro, Wells Fargo Corporate & Investment Bank. “We are extremely excited to be collaborating with HSBC on a project which places both organizations at the forefront of blockchain innovation. We believe this will be the first step of many utilising transformative technology across our industry in the years ahead.”

Mark Williamson, global head of FX partnerships & propositions at HSBC, adds, “As financial services continue to digitise the store of payment and value on blockchain, we are delighted to work with Wells Fargo in the adoption of this important cross-border digital backbone for the confirmation and settlement of Foreign Exchange trades. We are excited to continue to grow the FX Everywhere network whilst ensuring that we are well placed to transact in new forms of regulated digital currencies such as Central Bank Digital Currencies.”

The banks will be able to net bilateral payment obligations and settle on a pre-agreed cadence multiple times per day within the flexibility of the settlement windows enabled by this technology. They say that based on the results of this arrangement, the parties hope to expand the system to add more participants and to introduce a central Financial Market Infrastructure (FMI) provider to administer the platform rulebook.

“This historic move marks the inception of a profound change in FX settlements,” says Baton. “All market participants now have the opportunity to radically reduce their settlement exposure and associated risks outside of the CLS framework. All currencies, including emerging market currencies, which are ineligible for PvP settlement in CLS, can now be securely settled using distributed ledger technology that provides extensive flexibility and complete transparency.”

Aimed at extending riskless settlement more broadly across the market, Baton’s 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.

The availability of this transformative technology, the firm claims, provides a long overdue alternative to a market previously hamstrung by restrictive 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,” says Arjun Jayaram, CEO 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.”

As part of the implementation both HSBC and Wells Fargo have agreed to the Baton Rulebook, a framework the firm says is designed to provide legal certainty around settlement finality. Baton adds it is engaging with other FX trading businesses, as well as regulators globally, to expand market access to fast and riskless PvP settlement protection to a wider universe of participants.