Arjun Jayaram is CEO and Founder of Baton Systems, a provider of post-trade solutions for capital markets.
What were the key theme(s) in the payments and post-trade space in 2020?
The global pandemic has significantly impacted economies and increased pressure on market structure. Specifically, the pandemic has impacted interest rates and increased market volatility, which in turn has increased associated risks.
In the payments and post-trade space, it has exposed the issues with underlying liquidity, operational limitations, and settlement problems. Firms were unable to efficiently net payments and collaborate with counterparties in near real-time due to infrastructure limitations. The good thing is financial institutions, market infrastructures, and central banks, have quickly responded to the crisis. In one way, the pandemic has acted as a catalyst for change and more financial firms are focusing on investing and fast-tracking the onboarding of new technologies. We are entering a phase where financial institutions need to implement solutions in months or even weeks, demonstrate an ROI and address problems and regulatory changes. The emergence of neobanks, regulations, and low-interest rates have forced new timelines on banks. The traditional way of doing business is not an option anymore.
What are your expectations for 2021?
In 2021, there will be a greater move towards automation and what I’ve coined as, “just in time settlements.” There is a need for a real-time or on-demand payments model where the movement of assets is accelerated and orchestrated to the right place at the right time.
A major industry realization followed a recent Bank for International Settlement (BIS) report that warned the markets that FX settlement risk is on the rise again. As a result of this, we’re seeing a drive across the market to move to safe settlements and eventually to true payment versus payment (PVP) or delivery versus payment (DvP) settlement. There shouldn’t be any non PvP as it is manually expensive, labor-intensive, and increases risk. PvP doesn’t require the use of a single settlement venue like a clearinghouse, nor does it require smart contracts as the only mechanism for achieving PvP settlement outside a central entity. The next levels of systems will require distributed workflows that can settle assets faster and at lower costs. While token-based settlement systems are interesting, markets need account-based settlements where real assets are moved across real accounts and jurisdictions in a manner that is faster and cheaper.
What needs to change in order to address some of the industry pain points in 2021?
The entire lifecycle of the trade needs to be addressed to avoid risk evolving from the point a trade is made. This starts by enabling a system that eliminates manual processes and directly integrates with trading venues, account banks, custodians, and industry hubs via distributed ledger technology. The entire ecosystem of participants needs to have the visibility of their funding sources and obligations in real-time in order to better manage liquidity.
Additionally, institutions need to be able to run a set of “what if” scenarios. In other words, rules-based systems or statistical models to optimize for various outcomes such as liquidity optimization or risk reduction based on daily settlement risks. Further, all functions and data need to be accessible through real-time APIs and extremely reliable real-time data pipes.
The industry needs a system that enables PvP settlement between counterparties and consequently eliminates risk between them. This can be achieved by synchronizing and accelerating the movement of assets and obligations on demand. Examples of these workflows include cleared margin movements between an FCM and CCP, a UMR movement between counterparties, or a repo/reverse repo asset movement between principals. These are complex movements that involve bidirectional movements of assets across continents.
Real-time aggregations of market and asset positions across institutions are the necessary building block for the next set of market solutions.