Banks look to settle non-CLS currencies on Baton

HSBC and Wells Fargo said to be eyeing expanded use of blockchain tech to currencies not covered by CLS


HSBC and Wells Fargo are looking to take their use of blockchain technology for foreign exchange settlement to the next stage by including currencies that are not covered by CLS, FX Markets has learned.

The two banks announced late last year that they would begin using Baton Systems to conduct payment-versus-payment (PvP) settlement for the Canadian dollar, euro, sterling and US dollar, bypassing the main industry utility, CLS.

But FX Markets understands that HSBC and Wells Fargo are now laying the groundwork for pilot testing to settle a non-CLS currency pair on Baton, and that an announcement could be made within the next quarter.

Sources familiar with the matter say the banks are in the process of setting up accounts and getting their operations teams aligned to ensure that the settlement occurs smoothly in the time zone where the accounts are held.

Baton uses blockchain technology to allow users to monitor exposures in real time and settle payments in as fast as three minutes, compared to days under CLS. It is said to result in lower costs than CLS for the banks and could result in capital savings from reduced risk exposure – the idea being that these savings can be passed back to clients. HSBC is understood to have settled more than $3.5 trillion worth of FX trades so far between intragroup entities on Baton.

Baton Systems and HSBC declined to comment.

A spokesperson for Wells Fargo says: “We are pleased with the progress made on our agreement announced in December with HSBC to use a blockchain-based solution for the netting and settlement of matched FX transactions. We have seen success in our shared settlement ledger to process US dollar, Canadian dollar, sterling and euro transactions and we plan to extend the platform to settle additional currencies in the near future. We will share updates in due course.”

The move to non-CLS currencies comes at a time when the proportion of trades settling under a PvP structure has been steadily declining. According to the Bank for international Settlements, it has fallen from 50% in 2013 to 40% in 2019, thanks in part to the growth in currencies that cannot be settled at CLS.

Regulators have raised concerns at this rise in settlement risk, and it prompted efforts by CLS to create a stripped-back system for emerging market currencies. The BIS’s Committee on Payments and Market Infrastructures also floated a potential role for a public utility to tackle the problem.

Baton is not the only company offering blockchain technology to solve the issues with FX settlement. Others, such as Cobalt, R3 and Fnality are working on their own solutions for the industry.

The efforts also come as firms explore blockchain technology in other areas of the FX market, with Vanguard collateralising a 30-day euro/US dollar FX forward with State Street via a smart contract earlier this year to reduce counterparty risk.

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