Baton Systems reaction to the GFXD Global FX Division’s paper discussing recommendations for reducing settlement risk

Comments from Alex Knight, Head of EMEA, Baton Systems

We are in full agreement with the need to reduce settlement risk and supportive of the efforts being made by the GFXD.

Settlement netting is preferable to gross settlement

We absolutely agree that settlement netting is preferable to gross settlement, however through discussions with industry participants we’ve been repeatedly surprised by just how much flow fails to be netted. This is often because netting presents such a massive challenge to operations groups relying on legacy, siloed technology without the flexibility to net on a continuous or configurable basis.

If netting is to become the norm we believe the adoption of automated and configurable netting practices that flow seamlessly into a PvP settlement process will be key. The report cites CLS as the example, but there are other alternative offerings available that empower firms to achieve automated, configurable bilateral netting and then settle on a PvP basis on demand.
Although the paper references the use of manual settlement netting processes we would advocate this should be seen as a last resort. Technology is available today to automate these processes. Manual netting is massively resource intensive and introduces the potential for human error and operational risk both in the calculation of the netted values and through the agreement process.

Consistent settlement practice is preferable to ad hoc arrangements

There are many reasons why a firm may need to pull certain transactions from a netting set and the point I’d like to make is that doing so doesn’t necessarily mean that those trades then need to be settled manually or without the safety of PvP. With distributed ledger technology, because the parties are viewing shared data and using shared workflows, they simply need to agree that those transactions are to be removed from the netting set and submit them to an additional automated process for isolated settlement on a PvP basis. Therefore, negating the need for manual processing and the potential of settlement risk exposure.

Manual versus automated processes

We fully agree that every effort should be made to settle transactions using automated processes. The paper cites CLS as an example of an automated PvP system and the need to submit and match transactions in a timely manner. However, the reality is that banks often conduct transactions that fall outside of CLS cut-off times such as value today transactions. Settling these transactions via CLS within the given time constraints may not be possible and participants are obliged to use other settlement processes. To meet the need for a more flexible approach whilst retaining uniformity, Baton’s technology enables netting calculations to run continuously right up to the point the parties choose they want they settle – which they can then do on-demand, multiple times a day and then complete the entire process in a matter of minutes. As a result, banks now have the opportunity to settle as large a population of their transactions as possible through an automated and inclusive PvP mechanism.