(Fixes CLSNow launch delay in paragraph 14)

LONDON, Dec 11 (IFR) — Baton Systems, a two-year-old fintech company, is working with two of the biggest foreign exchange banks on a first-quarter launch of a new payment system.

The system aims to achieve capital and efficiency savings by eliminating a traditional 48-hour pre-funding window and reducing settlement time to less than three minutes.

The high-speed payment service, which is already used by both banks to settle over-the-air transactions, recently teamed up with NEX Optimisation, the post-trade arm of the former ICAP group, becoming the first third-party service to be integrated with NEX Infinite Platform.

According to Arjun Jayaram, CEO and Founder of Baton Systems, banks are under pressure to cut US$60 billion to US$70 billion from the combined annual technology and capital expenditure associated with post-trade services. And as banks catch up to an evolving regulatory landscape, which includes the implementation of MiFID II on January 3, that figure is set to rise unless significant efficiencies can be found.

“There are huge capital and operating inefficiencies in the back office,” Jayaram said. “At the end of the trading day, you have to move cash or other assets between participants. This movement is slow and costly.

This is because bank registers are not able to communicate directly with each other, forcing settlement service providers to stand in the middle. But transactions typically require pre-funding, forcing counterparties to tie up scarce capital up to 48 hours in advance.

Recent attempts to improve settlement efficiency have tended to focus on blockchain to create a centralized ledger. Baton’s approach is different. Instead of creating a separate register, the system acts as a translation tool, allowing individual bank registers to communicate directly with each other, for real-time payments.

“A blockchain solution is to use a third ledger, which changes the definition of money. We don’t think that’s the right way,” Jayaram said. means we’re not changing the definition of money or the way it moves.”

For counterparties to enjoy the full benefits of high-speed settlement, both must be linked to Baton’s system. Unlike blockchain solutions, however, transactions can still be settled if only one side is tied to the platform, with both reaping certain benefits, such as faster reconciliation.

Another problem with blockchain, according to Jayaram, is its inability to scale to meet the needs of capital markets. As such, the company built its own distributed ledger from the ground up.

“You need to be able to handle a billion events a day, but blockchain is two or three orders of magnitude away from that,” Jayaram said. The Baton system can handle 83,000 events per second, the equivalent of over 7 billion events in a 24 hour period.

According to Jayaram, the system already has buy-in from central banks and the company is in talks with regulators.

“They like that we’re not changing the definition of money – we’re just making it faster and more transparent,” Jayaram said.

The historical supplier, CLS, is however not left out. The FX settlement firm aims to improve efficiency and reduce counterparty risk with the launch of a same-day settlement service, CLSNow. The platform is expected to go live in the fourth quarter of 2018, initially for US dollars, British pounds, euros, Swiss francs and Canadian dollars.

Although not built with blockchain, CLS uses the technology for its proposed bilateral payment clearing service, CLSNet. The service aims to bring standardization and post-trade efficiency to a wide range of FX transactions – spot and derivatives – in 140 currencies, which currently settle outside of the main CLSSettlement platform.

For Baton, while FX settlement is the focus of the initial launch, the company is also working with a major broker and central counterparty clearing house on a system that has proven capable of reducing post clearing and settlement time. -negotiation, including reconciliation, from 4 p.m. to less than four minutes. (Reporting by Helen Bartholomew)