Baton Systems

Redefining FX post-trade processing

Award winning Baton Systems is looking to shape the future of payments and post trade processing. Its
distributed ledger-based platform enables real-time visibility and movement of currencies and assets,
reducing settlement risk and increasing available funding and liquidity. e-Forex spoke with the company’s
Founder and CEO, Arjun Jayaram, to find out more about how Baton Systems is introducing fully
interoperable digital solutions, from trade matching through to settlement, and the impact this will have
on the FX market. Arjun was also joined by three colleagues from Baton’s senior management team: Alex
Knight, Head of EMEA; Jerome Kemp, President and David Ornstein, COO; to discuss the significance of
Baton’s recent completion of the world’s first interbank riskless FX settlement outside of CLS.

Arjun, can you tell us about your
previous experience in Fintech and
explain how that led you to tackling
a very specific challenge in the
capital markets space?

Baton Systems is actually the second
company I’ve founded, my first
company was acquired in 2013.
Following its sale I moved to Twitter
and from there into payments.
My background is in engineering,
technology and product development
and so I was able to develop a
deep understanding of the complex
constraints of the problems in
the payments arena. Through a
relationship with the CME, I was
introduced to capital markets and to
Baton’s now President, Jerome Kemp,
who was at Citigroup at the time and
actually became our first client.

As I learnt more about payments and
post trade, I came to realise there are
fundamental structural issues that
play a massive role in the colossal
level of settlement risk faced by FX
businesses every day. My passion to
solve this problem and democratise
access to the financial market
infrastructure necessary to execute
real-time, riskless settlements without
the burden of pre-funding led to me
founding Baton Systems about six
years ago.

We are now at an exciting stage
in our corporate evolution, we’re
rapidly maturing and beginning to
really scale the business. One of the

challenges we now face is ensuring
we continue to protect the same core
values and strong ethos that have
been integral to our success to date.

Please tell us a little about your job
and day to day responsibilities at
Baton Systems.

As Founder and CEO my focus
is primarily on strategy from a
technology and product definition
perspective. As I mentioned, we
are now moving to the next step as

we start to see non-linear growth
with interest continuing to increase
from firms keen to take control and
effectively address the risk, liquidity
and funding issues that have plagued
FX settlements, and other capital
markets payments processes, for far
too long.

At the moment, we move somewhere
between $12 billion to $20 billion
of asset value each day, but I am
focused on how we can grow this
by many multiples. That scale will

Jerome Kemp joined the firm as President last year

Alex Knight brings a wealth of global experience in the industry

come from focusing on not just
on the technology and product
but by thinking about our whole
organisation, which is why we’ve
been laser focused on augmenting
our team with the right people with
the necessary skills and experience
to help us to achieve our growth
ambitions.

Baton has certainly attracted a
number of top class technology,
payments and capital markets
veterans. Who are the key members
of your executive team and what
roles do they each play in helping to
drive the business forward?

I’ve already mentioned Jerome Kemp,
who joined Baton initially as a Senior
Advisor and was appointed President
last year. He’s a leading industry
practitioner with over 35 years of
market experience, most recently as
Global Head of Futures, Clearing, and
FXPB at Citigroup. Last year he was
inducted into the FIA Futures Hall of

Fame. Jerome is someone I respect
a lot and as Baton’s president, he is
now empowered to work towards
finally solving the key post trade
and structural issues which kept him
awake at night whilst in his previous
senior leadership roles at Citi and J.P.
Morgan.

Like Jerome, Alex Knight also brings a
wealth of global industry experience.
Alex joined Baton as Global Head of
Sales and EMEA in 2019, following
18 years at Citi where he held a
number of roles in innovative FX
business lines including Global Head
of FX Margin Trading. Together with
Jerome, Alex is helping us to grow
the commercial side of the business.

I brought in people like Alex and
Jerome because they are experienced
in not just building businesses but
they’ve witnessed first-hand the
extensive challenges that limited
access to safe settlement mechanisms
and 24 hour settlement cycles can

have on both a banks’ risk profile and
it’s bottom line.

We’re also privileged to count both
J. Christopher Giancarlo, Director
of The Digital Dollar Project and
former CFTC Chair, and Bill Coen,
former Secretary General of the Basel
Committee on Banking Supervision,
as Senior Advisors to Baton. Their
backgrounds speak loudly to the
importance of the regulatory
agenda relative to Baton’s objective
to transform post-trade market
structure.

Most recently we have added David
Ornstein to the team. He joined
Baton as COO this January. David
brings 25 years of capital markets’
experience, including 13 years as
COO of Barclays’ Global Markets
business where he was particularly
focused on both the regulatory
change and business reengineering
agendas. He brings to the team a
deep appreciation of the intractability
of legacy infrastructure in financial
markets along with keen insights as
to how to help institutions better
optimise their end-to-end operational
workflows and ultimately reduce
costs.

Turning to Alex, what type of
firms are now working with Baton
and looking for it to meet their
demands for capital efficiency, risk
management and the competitive
advantages that are always
associated with the use of next
generation technology?

If you look at our client list, you’ll
see it’s the world’s largest financial
institutions where our main focus
has been so far. We are continuing
to have very detailed discussions
with nearly all of the major banks
globally around the critical issues
that they have regarding FX settlements
and intraday liquidity management

in their capital markets businesses.
We are now starting to broaden
our focus as we seek to serve banks
outside of that very top tier, as
well as members of the buy-side
community.

The challenges that most large banks
face is that they operate their post
trade systems on legacy platforms
and those legacy platforms are
generally siloed. This adds to the
complexity of the problem when
these firms consider how to reengineer
their post trade processes - and as we
know, ripping out and replacing critical
elements of the
post trade infrastructure is risky, time
consuming and expensive.

As such, whilst we find when
speaking with potential clients
that the value proposition of our
blockchain-inspired Core-FX solution
is well understood, that with this
technology the riskless settlement
of all currencies pairs, at a time they
choose, without pre-funding would
be within their reach, we spend
a lot of time demonstrating the
interoperability of the Baton platform
with existing legacy systems. These

conversations focus on how we can
securely and seamlessly integrate
into existing systems and processes
to deliver the flexibility, transparency,
audibility and non-repudiation
benefits of distributed ledger
technology (DLT) in a manner that

doesn’t disrupt their existing process,
but rather enriches it.

Jerome, a major challenge for
financial market participants is how
to deal with the trillions of dollars
of settlement risk and how to tackle
intraday liquidity costs. Recent
updates to the FX Global Code
included changes to recommended
best practice for FX settlements.
What was Baton’s response to these
challenges and in what ways do they
underline the advantages of your
own solutions?

This is a very important point and one
which I believe is going to be critical
in terms of the overall evolution of
the post trade space. These processes
currently run on hardwired, server
based networks and the move to fully
digitised post trade infrastructure
over the next few years will be reliant
on the regulators stepping in to
encourage innovation.

Baton Systems - Redefining FX post-trade processing

We are very engaged with regulators
in the US, the UK and elsewhere.
Indeed both Arjun and I were recently
vited to sit on the working group
of the Committee on Payments and
Market Infrastructures (CPMI) charged
with examining the expansion of PvP
solutions. Our regulatory engagement
is focused on the evolution and
development of approaches that
will accommodate the considerable
transformational impact that
companies like Baton are having on
the post trade environment.

Global regulatory bodies are keen to
see the post trade space evolve and
are very inclusive in terms of their
approach. I believe that by and large
global regulators are encouraged
by the progress being made. We
are essentially constructing a new
ecosystem which allows for a very
significant expansion of riskless
settlement for FX transactions, beyond
what is currently possible today.
Regulators are very keen to see access
to PvP settlement within the reach

of significantly more participants
and cover a much greater range
of currencies relative to the status
quo, and Baton is proving that this is
indeed possible.

And coming back to Arjun, Baton’s
Core-FX solution has been in the
news recently after Wells Fargo and
HSBC completed the first interbank
PvP settlement outside of CLS using
distributed ledger technology from
Baton Systems. Can you explain
the significance of this, for both the
company and the industry?

FX is the largest OTC market with
close to $19 trillion of average daily
volume exchanged, but the only venue
where those trades can be settled
with the benefits of PvP is CLS, which
has 78 members currently and only
supports selected currencies. CLS does
solve a problem and has significantly
improved the FX market, but it is a
partial solution to the market problem.
The number of participants operating
in the global FX trading ecosystem

is in the tens of thousands, all of
whom need access to safe settlement
processes. Furthermore, there are over
100 currencies that need to be settled.
We are focused on delivering the
technology required to safely settle
those FX trades that are currently
ineligible for PvP protection via CLS,
in order to extend the benefits of riskless
settlement to the entire market.

By using DLT, we have enabled banks
to connect into Baton’s CORE-FX
to move funds on a PvP basis in
commercial bank money. Using
Core-FX the settlement process,
which used to take 24 hours, can
now be completed in three minutes.
Counterparties can settle on-demand,
multiple times a day without the
liquidity constraints that pre-funding
introduces. This is achievable with
full transparency and extensive
flexibility that allows the parties to
not only choose how they net or
whether they settle in gross, but also
to align settlement time-frames with
corresponding liquidity events.

It is not just the technology that we
offer, but also the governance and
structure we provide with the Baton
Rule Book, which enables participants
to achieve legal settlement finality.

Can you elaborate on which
currencies you cover and what the
process is for increasing the number
of currencies?

Core-FX is currency agnostic, we have
actively settled 18 currencies to date,
and have the ability to quickly add any
currency to the network, including
emerging market currencies. These
currencies have experienced rapid
growth in traded volumes over recent
years, yet they remain ineligible for
PvP settlement via CLS. They are often
highly volatile with shallow liquidity
and this leads to more constraints
being applied in terms of the trading
facilities made available.

As has been mentioned, Baton CORE-
FX is based on DLT. David, why is
this technology such a good fit for
payments and post trade services in
meeting this challenge and why has it
not been done before?

I used to see a lot of start-up pitches
based on DLT, but often those
solutions were too much “Tech” and
not enough “Fin;”. By this I mean
that they didn’t really understand
the complexity of the actual financial
ecosystem well enough to understand
the journey from the test bench to live
deployment and actually delivering
business benefit. Many of the FinTechs
who plan to rip and replace aren’t
adequately cognisant of the challenges
in delivering essential infrastructure
in production, at scale. Organisations
can’t absorb change that quickly
and won’t be able to secure the
permissions needed to do that. You’ve
got to be able to very clearly justify
why you’re tinkering with an essential
service.

The way Baton is using DLT is different. It
builds rails which run alongside existing
systems and infrastructure. Baton
facilitates the move from centralised
to decentralised settlement without
disrupting existing functions. It provides
a viable alternative to the current
process and workflows and facilitates a
responsible and progressive migration,
while offering full interoperability with
existing legacy technologies, so there
is no immediate need to try to rip and
replace 30 years of code.

Finally Arjun, you have previously
said that the world of clearing and
settlement is on the threshold of
revolutionary change. How ambitious
are Baton’s plans for playing a pivotal
role in this and how optimistic are you
that you and your team will be able
to achieve them?

We are very optimistic. Our mission is
to democratise the settlement process,
improving it greatly from the current
system characterised by centralised
venues which exclude so many

participants from the opportunity
to safely settle their FX trades. You
cannot solve this problem until you
solve the market structure issues. I’m
excited because this is not a concept,
a prototype or a project, we’re now
laying the rails and in a live production
environment actually executing riskless
settlements on a daily basis. What
we’re doing is truly game changing.

Every time we onboard a bank, that has
a snowball effect and leads to further
adoption. We can add unlimited banks,
from multiple geographies, who will
then be able to eliminate risk by using
our platform for settlement. We see this
as very much a win/win situation, not
only for the large sell side banks, but
also for their clients downstream and we
are already seeing a significant uptick
in interest following our December
announcement. The whole team and
myself included are very excited about
ur progress so far and the significant
role we are playing in the long-awaited
evolution of payments and settlements
in the financial markets.

DAVID AND I AND THE WHOLE
TEAM ARE VERY EXCITED
ABOUT OUR PROGRESS SO
FAR AND THE SIGNIFICANT
ROLE WE ARE PLAYING IN THE
LONG-AWAITED EVOLUTION OF
PAYMENTS AND SETTLEMENTS
IN THE FINANCIAL MARKETS