Baton Systems’ Alex Knight on solving post-trade with DLT at FIA Boca 2023

The Futures Industry Association (FIA) welcomed the global derivatives industry to the 48th annual Boca International Derivatives Conference, held on 14-16 March in Boca Raton, Florida.

FIA Boca 2023 attracted more than 40 exchanges and trading venues as well as regulators looking to take the pulse of the industry as trading volumes in global exchange-traded derivatives rose by 34%, printing a new record for the 4th consecutive year.

Baton Systems: from trade matching to settlement

Among the attendees was Alex Knight, Head of Global Sales and EMEA at Baton Systems, the post-trade specialist leveraging distributed ledger technology (DLT) to introduce fully interoperable digital infrastructures from trade matching through to settlement in order to revolutionize how payments are made in the world’s largest financial markets.

Collateral management in face of rising interest rates

Baton Systems solutions include Core-FX (to settle FX trades with smart netting and payment strategies), Core-Liquidity (asset ownership transferred in real time, on demand, 24/7, in a legally enforceable way), Core-Payments (complete control and visibility over payments and settlements), and Core-Collateral (for clearing firms and CCPs to automate and optimize collateral holdings and expedite the movement of cash and securities).

Based in London, Alex Knight joined Baton Systems in late 2019 and was initially tasked with setting up and resourcing the EMEA business. He also heads up the global sales function. The well-traveled executive joined the DLT-powered post-trade pioneer after 18 years at Citi, having been with the bank in Sydney and Singapore from 2001 – 2015, and then Global Head of Sales and Client Coverage for Citi’s FXPB business, based in London, from 2015 to 2019.

How to reduce cost of settlement fails

Baton aims to be the leading open post-trade network and platform for wholesale market participants by delivering real-time data and workflow collaboration with riskless, on-demand and instantaneous settlements of all assets. FinanceFeeds Editor-in-Chief Nikolai Isayev took the opportunity to speak with Alex Knight at FIA Boca 2023 to learn more about how Baton Systems can solve many of the issues affecting the post-trade workflow today.

To answer the first question, about what needs to change to reduce the cost of the rising number of settlement fails in derivatives and FX trades, Alex Knight pointed to post-trade that is better coordinated, transparent, and automated to allow for a scalable and configurable process, but which doesn’t have to be a one-size-fits-all. In addition, it must have straight-forward matching, netting, pre-affirmation after netting, and settlement.

“What firms need to put in place are systems that allow automation and configuration of those processes; systems that allow the identification of fails and breaks much earlier in the lifecycle of the transaction. So, as an example, rather than realizing on the value date just before cutoff that you don’t have an SSI (Standard Settlement Instructions) in place, identify that much further up in the chain.”

Alex Knight then mentioned the purview of FIA, the very large notionals in cleared collateral of derivatives, and the processes that are operationally intensive but fractured, to point out that the key is to introduce a truly interoperable technology layer with deep integration and flexible workflows to bring together processes under a common architecture whilst retaining individual processes.

In the face of rising interest rates, firms have increasingly been posting collateral in the form of securities rather than cash. Here, Baton Systems can have a say in improving collateral management for firms.

“The focus always ends up with orchestration and acceleration of movement of the underlying asset, but to get there we’ve got to start with good data”, Knight stated. “We spent a lot of time on integration into key elements of CCPs and CSDs, integrating such that our customers can see on intraday as well as end-of-day basis, can see their sources and use of collateral to make better decisions, so they can run rules against that normalized aggregated data, particularly with eligibility data. You can then start an optimization process that is really thoughtful and helpful.”

The Baton Systems executive highlighted the role of connectivity to actually make those movements happen. “The integrations we’ve built with CCPs represent over 90% of collateral posted in the cleared derivatives space”, he said, pointing to two-way integrations: “consuming real time data from a portfolio of CCPs and allowing customers to send pledge-and-recall instructions to those CCPs in a consolidated way.”

Alex Knight also noted that, if gaps and shortfalls in existing processes occur because of increasing collateralization requirements, a natural response might be to place a very large buffer to avoid them, but that would be sub-optimal from a financial perspective. “Again it comes back to the nuance of being able to anticipate what the requirements are in order to position quickly and effectively rather than using “set-and-forget” buffers. It’s a lot about the ability to move assets quickly and knowing if they’ll be accepted by the CCP. Providing transparency to the actual state of the move is a key element of what people need.”

Distributed ledger technology (DLT) is not crypto

Baton Systems offers a DLT-powered clearing and settlement platform and, over a decade since the launch of Bitcoin, many people still conflate crypto with blockchain with DLT. “That’s misleading”, Knight noted as he focuses on the technology which is being used for the delivery. “Blockchain is an enabler but with a limited use case in established financial markets, and more use cases in developing financial markets, creating infrastructure from scratch.”

“We feel we have a strong value proposition through the use of DLT in order to facilitate workflows that can be shared, in our case, by regulated institutions. I feel it’s a highly investible proposition. Our entire tech stack is based around DLT”, he added, concluding that interoperability is key.