Daily volumes on Baton Systems’ Core-Collateral and Core-FX platforms have soared in recent weeks. Why do Baton’s clients use our solutions more in times of market turmoil?
Baton’s daily volumes in Q1 2023 have hit record highs, with the week of March 20 2023 seeing volumes in our Core-Collateral™ product of double our usual average, and volumes in Core-FX™ almost four times higher than at the end 2022.
Why are volumes surging?
As evidenced by recent events, credit risk among banks has dramatically increased over the past few months. Banks wishing to eliminate settlement risk with their counterparties can do so by using Core-FX to settle on a PvP basis, even for non-CLS currencies. With Core-FX, it’s only when both sets of funds have moved that change of ownership can take place, removing the risk of a payment being made to a counterparty that has defaulted on their commitments.
Turning to Core-Collateral, asset price swings at the CCPs have been causing dramatic moves in both initial and variation margin. For large clearing members, this can result in their clients having either a large excess or a large deficit, which means a lot of corresponding client movements of collateral. Because Core-Collateral connects clearing members to multiple CCPs and tracks the location of their collateral in real-time, assets can be mobilised much more rapidly and efficiently. So if a client is recalling assets, we can help the clearing member get those assets back to their end client quickly.
Real-time information from CCPs can help clearing members predict the need for collateral movements throughout the day. So, if new assets are being pledged by underlying customers, Baton can help the clearing member pledge those out to the CCPs much faster than would otherwise be possible.
“With Core-FX, it’s only when both sets of funds have moved that change of ownership can take place, removing the risk of a payment being made to a counterparty that has defaulted on their commitments”
Better visibility means business as usual
In volatile markets, the margin requirements of CCPs tend to increase significantly. With Core-Collateral, clearing members have better visibility of their assets, allowing better informed decision-making. Baton’s full STP of client pledges and recalls mean that our clearing member clients aren’t constrained by operational capacity and can continue to operate as usual while more effectively managing their margins at CCPs.
Alongside this, without reliable, and scheduled PvP settlement, banks can’t predict when they are going to be paid, which leads to the over-funding of accounts owing to a lack of visibility of their liquidity position throughout the day. Core-FX eliminates this uncertainty.
PvP settlement, achieved rapidly, at a time that suits the counterparties, across a wide range of currencies using Core-FX, coupled with efficient management of cash and non-cash collateral via Core-Collateral, means that organisations overall benefit from better liquidity management.
“With Core-Collateral, clearing members have better visibility of their assets, allowing better informed decision-making”
Cash is king
The simplest way for a clearing member to meet margin calls from the CCPs is with cash. Each CCP is able to call cash from a Clearing Member’s account to cover its requirements. However, in the current climate of high-interest rates, it’s generally beneficial for a clearing member to offer non-cash collateral to a CCP wherever possible, allowing cash to be used optimally to generate income for the firm.
Over the past few months, clients have started to move their assets being pledged out to the CCPs from cash to as much non-cash as possible. Core-Collateral’s ability to obtain real-time balances from CCPs and to enable the automatic delivery or recall of assets ensures that all available cash and non-cash collateral can be used optimally.
“Core-Collateral’s ability to obtain real-time balances from CCPs and to enable the automatic delivery or recall of assets ensures that all available cash and non-cash collateral can be used optimally”
No capacity constraints
Traditionally a clearing member would simply post large lots of securities to the CCPs, because, in doing so, the number of actual movements they have to make is minimised. But with Baton’s technology, that’s no longer a constraint. Firms can mobilise smaller lots as well as larger ones because Core-Collateral allows STP of pledges and recalls out to the CCPs. Many of our clearing member clients have direct API connectivity to Baton, so they will message those movements to Baton, then Baton messages the movements to each individual CCP portal.
“Many of our clearing member clients have direct API connectivity to Baton, so they will message those movements to Baton, then Baton messages the movements to each individual CCP portal”
Staying ahead of the curve
Baton is fortunate to have great partner clients. Those clients are at the cutting edge of innovation, particularly in the collateral management space, and we have often taken the lead from our clients when looking at new product development in that area.
Core-FX has been developed in consultation with Tier 1 banks, central banks, and regulators and has been built to meet the interoperability, extensibility, and customisation requirements of large financial institutions.
We’re committed to providing firms with greater transparency and unfettered access to more secure and efficient post-trade processes.
I hope you have found this blog useful in explaining how clients are using Baton’s technology in today’s volatile market conditions. To learn more about our products please don’t hesitate to contact me at [email protected].