Osttra Takes On Baton’s Core-FX For FX PvP Settlement
Posted by Colin Lambert. Last updated: March 7, 2024
With The Full FX View
Post-trade provider Osttra, a joint venture between CME Group and S&P Global, is to launch a new FX PvP (Payment vs Payment) settlement service for the FX market using the Baton Systems’ Core-FX service – as part of the arrangement, Osttra will take on the operation of Core-FX, including the administration of the rulebook.
The target of the service is, the firms stress, providing a service for non-CLS currencies in an effort to meet demands from the world’s central banks and other authorities to minimise Herstatt Risk, by increasing the use of PvP settlement. HSBC and Wells Fargo, who were party to what was claimed as the world’s first PvP FX settlement outside of CLS on the Baton system in 2021, will adopt the new Osttra-hosted service for the first half of 2024.
The PvP service will be delivered on the distributed ledger technology (DLT) from Baton and marks, Osttra claims, “a significant milestone in increasing market wide access to PvP, helping to address FX settlement risk concerns”.
It adds the focus will be on settling flows not currently settled on CLS, including non-CLS eligible transactions such as offshore Chinese renminbi, which has almost doubled in the percentage share of global FX trading volumes from 2019 to 2022 according to BIS. “Bank and non-bank market participants will also have much greater flexibility to settle FX transactions intraday, without being tied to the CLS cut-off window,” Osttra says.
The Full FX View
Without knowing what the commercial arrangements involved in this deal are, it seems to make sense if PvP settlement is to further permeate the FX industry. I have noted before that CLS’ structure and governance model makes it a heavy lift to add currencies, and therefore a response from that direction would probably not satisfy those in authority who clearly want accelerated change.
While Baton’s system is highly-regarded, it was struggling to make real headway outside of the early adopters, in many ways it faced the classic situation of many fintechs – a great idea and enough business to make it viable, but a lack of resources to truly scale it on a global basis. Osttra has that global reach and, importantly down the line, other services that can leverage this solution.
Clearly Osttra studied the market before making this deal, but in reality, given the status of the various players, Baton was the only realistic partner with an operating model and live clients. It is notable, however, that in the release announcing the deal, Osttra says Baton has handled over $8 trillion in settlement value “to date”. Using the end of December 2021 as a starting point, the announcement of the first non-CLS PvP payment, this works out to roughly $15-16 billion per working day – respectable for a relatively new business, but probably not enough to move the needle for the authorities.
Looking ahead for the two businesses, the urgent need for Osttra is to get as many of its extensive client base hooked up to the service as possible so that they can benefit from PvP in non-CLS currencies. It will be interesting to see if wider exposure to the Baton solution elicits greater interest in faster payments. There is a school of thought that T+1 is just the start of a faster settlement evolution, if that is the case, for those firms that want it, DLT seems to be the technology of choice. Not everyone wants instant, or atomic payments, but as I wrote recently, flexibility would be a great option to have when it comes to settling and making payments.
For Baton, this relieves it of what has to be the burden of trying to globally scale a solution, something that eats up resources, and allows it to focus on evolving existing products and developing new ones. FX settlement is the product for which it is probably best known, but that does not mean other markets don’t require solutions.
It will be interesting to see if this approach is copied by some other fintechs. Rather than try to get thei entire business bought, get that great idea into the mainstream by effectively selling it, or leasing it perhaps, to a global player with the footprint and resources to truly scale it, leaving you carry on doing what you do best, innovating.
On a broader canvas, this is also another great example of the FX industry being faced with a challenge from the world’s authorities, and before those bodies need to get really involved, coming up with a solution to the problem. Baton’s system works and Osttra has the scale to truly deliver it on a global scale – if PvP is not extended in the FX market from here, there will only be one group to blame, the participants themselves.
The launch is being represented as the first step in a broader Osttra strategy to improve the market structure of OTC markets and it is intended, the firm says, that the service will evolve to 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).
“Since 2018, HSBC FX Everywhere has used Baton’s Core FX technology to settle 16 million FX trades across 13 different currencies totalling $8.1 trillion,” says Mark Williamson, global head of FX and commodities partnerships and propositions at HSBC. “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, adds, “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”.
Finally, Arjun Jayaram, founder and CEO of Baton Systems, says, “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.”