Baton Systems, the fintech that provides post-trade solutions, has integrated with LCH, the clearinghouse of the London stock exchange group, to expand its end-to-end collateral workflow automation network for derivatives .
Alex Knight, Head of Global Sales and EMEA at Baton Systems, told Markets Media: “We are in direct contact with LCH, CME, Eurex and SGX, so we are able to handle a significant portion of the global collateral that is deposited. with CCPs. We seek to expand this network according to the priorities of our customers.
He added that clearing members manage complex activities, in which multiple legal entities often face multiple CCPs and act on behalf of clients, in addition to their own internal activities. Baton allows businesses to view all of this information in a single dashboard.
“We allow businesses to see standardized aggregate information on an intraday basis to enable them to make better decisions,” added Knight.
Baton was founded in 2016 by technology, payments and capital markets veterans. In April of this year, J. Christopher Giancarlo, former chairman of the US Commodity Futures Trading Commission, joined Baton as senior advisor. Giancarlo is currently Senior Legal Advisor to the law firm Willkie Farr & Gallagher and co-founder of the Digital Dollar Project to Advance the US Central Bank’s Digital Currency Review
Giancarlo said in a statement: “Baton is putting in place a solution that works today to improve the speed and accuracy of warranty management. “
In May of this year, Baton said that JP Morgan would be the first client to manage its collateral at LCH using its platform. In 2019, Baton and the bank developed a solution that allows the near real-time orchestration of cash transfers and guarantees to several clearing houses.
Baton Systems has integrated with @LCH_Clearing to automate the end-to-end guarantee workflow for derivatives participants. @JP Morgan will be the first Baton customer to manage their collateral at LCH using the Baton platform. https://t.co/AOg2P8lZ7x#fintech # derivatives
– Stick systems (@batonsystems) May 6, 2021
Knight said the integration of LCH is a really important step in the further development of Baton’s network for automating the collateral workflow for cleared derivatives.
“Establishing a two-way connection with LCH was at the top of the list of requirements of our Clearing Member customers,” he added.
Baton consumes end-of-day and intra-day data from clearing houses regarding positions, margin requirements and eligibility information. The instructions of the clearing members for the movement of the collateral are then reintegrated into the CCP by Baton.
Anthony Fraser, head of global clearing operations and cost and commission services at JP Morgan, said in a statement: “This will bring greater efficiency to our collateral management process and provide better real-time visibility of our margins and our collateral. “
Knight explained that Baton also allows clearing member companies to view their bonds and the holdings they hold with their custodians. In addition, having up-to-date information on eligibility and concentration limits, etc. and CCP data on asset haircuts, the decision-making process becomes much more robust.
Baton also performs due diligence with the CCP to determine whether the instructions, individually or collectively, will result in a violation and probable rejection.
“By automatically tracking the progress of collateral instructions and movements, we provide considerable visibility, flexibility and control to the clearing company,” added Knight.
Clearing houses can also set up automatic alerts or automated collateral movements when certain thresholds are exceeded, so that there is straightforward processing for the security deposit with little manual intervention required.
Knight continued that clearing houses often hold excess collateral with central counterparties and by having access to better data and being able to respond more quickly, this can be reduced and lead to a significant benefit by reducing the cost. funding.
“Clearing houses can benefit from a significant increase in net interest income, which has become more important because CCP collateral or margin requirements are now so high,” he said.
Clarus Financial Technology, the provider of derivatives analysis, said in a blog that the initial margin for interest rate swaps remains near record highs.
What’s new in CCP Quant Disclosures – 4Q20? https://t.co/AMKb3iTbtG
– Clarus (@clarusft) April 14, 2021
CCPs publish over 200 quantitative data fields including margin, default resources, credit risk, collateral, liquidity risk, back-testing as part of CPMI-IOSCO public quantitative disclosures.
Amir Khwaja, chief executive of Clarus, wrote that the initial margin for swaps has remained at record levels since March 31, 2020, the quarter of the Covid-19 crash.
“It is a bit surprising that the initial margin did not fall given the lower volatility in the market, but again, the risk position of CCP members as of December 31, 2020 will not have been the same as ‘as of March 31, 2020, “Khwaja added.
Knight continued that Baton had seen renewed interest after the very high volatility last year due to the Covid-19 pandemic, as the business processes of many companies struggled to keep up due to the intervention. manual required. Additionally, data visibility was an issue as most businesses relied solely on end-of-day reports.
“The need for up-to-date data was really important when companies were looking for liquidity,” added Knight. “A clearing member said after the event that he spent many hours tinkering with reports, so the benefit of aggregating and visualizing data in a consistent and reliable format is huge.”
Additionally, one of the barriers to scaling a clearing business can be the highly manual processes between clearing companies and their underlying clients. “It’s a space where we can do a great job and we chat with a few of our clients,” Knight said.
He added that Baton’s distributed ledger technology allows businesses to fund their liquidity as efficiently as possible, as they can choose to run multiple settlement cycles during the day.
“The industry pays hundreds of millions of dollars a year to fund cash, so trying to help solve this problem is really essential,” added Knight.
Prior to joining Baton Systems, Knight spent 18 years at Citi, where he was most recently Global Head of Sales and Client Coverage for Citi’s FX Prime Brokerage and had also set up and led the Asia Pacific FX Prime business. Brokerage of the bank from Singapore.
In January of this year 2021, Baton entered into a partnership to combine its payment infrastructure with Cobalt, the foreign exchange and digital asset infrastructure provider, to provide a seamless end-to-end foreign exchange settlement solution.
– Finextra (@Finextra) January 19, 2021
Arjun Jayaram, chief executive of Baton Systems, said in a statement that heightened market volatility in 2020 exposed the underlying liquidity, operational infrastructure and settlement issues that have plagued the industry for decades.
“By integrating our real-time payment-to-payment FX settlement process into Cobalt, we can provide enhanced visibility and control over the settlement process to a new market segment, thereby eliminating many systemic risks that currently plague the industry. Jayaram added.