OSTTRA is a relatively new company formed in 2021 as a joint venture between CME Group and IHS Markit (now a wholly-owned subsidiary of S&P Global). It unites four businesses that have been central to post-trade evolution and innovation for over 25 years: MarkitServ, Traiana, TriOptima, and Reset. With 1,200 employees and eight global office locations, OSTTRA now plays a critical role in supporting global financial markets by connecting thousands of counterparties on its multi-asset networks, underpinning the post-trade lifecycle from trade capture and portfolio optimisation to clearing and settlement.
Earlier this year, OSTTRA partnered with Baton Systems to launch a new FX PvP (Payment vs Payment) settlement service, aimed at mitigating bilateral settlement risk in FX markets. This initiative is part of OSTTRA’s broader strategy to enhance the market structure of OTC markets and reduce counterparty exposures.
TradingTech Insight sat down recently with Joanna Davies, Head of Trade Processing, and Steven French, Head of FX and Securities Product Strategy, to discuss how this and other OSTTRA initiatives are addressing some of today’s most pressing post-trade challenges.
TTI: Jo, what are some of the key trends and challenges you are seeing in the post-trade space, particularly with the transition to T+1 settlement?
JD: The realm of post-trade activities is no longer confined to the back office but is increasingly impacting front-office operations. This shift is evident in the transition to T+1 settlement, which has underscored the critical importance of efficient post-trade processes. Traditionally, areas such as liquidity management, credit risk, and liquidity provision were handled separately from post-trade operations. However, with the advent of automation in these domains, there is a growing convergence. The T+1 settlement initiative has illustrated the necessity for robust infrastructure and comprehensive risk management strategies. While there are differing views on the industry’s preparedness—whether it was a result of meticulous planning or the inherent flexibility of existing systems—the transition has undeniably focused attention on post-trade processes. Significant efforts have been dedicated to preparation, especially in managing settlement risk and liquidity provision. The integration of these functions into the front office highlights the evolving landscape where post-trade efficiency is paramount to overall financial operations.
TTI: Steve, where are the main areas of settlement risk, and how is OSTTRA helping the industry mitigate these risks?
SF: The significant daily risk of FX settlement outside of Continuous Linked Settlement (CLS) is a pressing concern, given the estimated daily exposure of $2.3 trillion settled outside the utility today. This substantial risk is particularly pronounced for emerging market currencies, which struggle due to the absence of a suitable settlement platform. The infrastructure and legal complexities required to establish such a platform are substantial, creating barriers to adoption.
Addressing this issue, OSTTRA, in collaboration with Baton Systems, has developed an innovative PvP (Payment vs Payment) settlement orchestration platform specifically targeting non-CLS currencies. The initial focus is on the Chinese yuan (CNH), with major banks such as HSBC and Wells Fargo already onboard. This platform aims to mitigate settlement risk by providing a structured and reliable solution for managing PvP settlement of these currencies, paving the way for broader participation and increased security in the settlement process. By targeting these high-risk areas first, OSTTRA and Baton Systems are setting the foundation for a more secure and efficient global settlement infrastructure.
TTI: What kind of appetite is there for such a new settlement infrastructure?
SF: There is a strong industry interest in reducing settlement risk, demonstrated by the active participation of multiple banks in discussions aimed at expanding the new settlement platform. Recently, we convened a working group and are open to adding any other participants eager to collaborate on this initiative to join. The discussions to date have moved beyond the feasibility of the platform and are now focused on practical steps for implementation, such as how to onboard and make the system work effectively.
Achieving critical mass is seen as essential, with the participation of a few additional major banks likely to drive broader adoption across the industry. Currently, HSBC and Wells Fargo are already on the platform, and the inclusion of just two or three more major players could significantly move the needle.
The primary hurdles to adoption are not technical but involve changes in treasury operations, particularly concerning the management and agreement of nostro accounts. Overcoming these operational challenges is key to leveraging the already established network and technological infrastructure, thereby facilitating a smoother and quicker transition to the new system.
TTI: Can you both provide more details on your technology initiatives, particularly the integration between OSTTRA and Baton Systems?
SF: Essentially we’re leveraging OSTTRA’s robust matching engine in conjunction with Baton’s advanced shared ledger technology, to ensure secure and efficient settlement processes, which are critical. The matching engine, which has been thoroughly tested and widely adopted, is now connected to Baton’s next-generation shared ledger, which provides atomic settlement -. This means that PvP transactions will only be executed once both parties have agreed, thus ensuring transaction finality.
JD: We are also developing advanced tools designed to identify and resolve trade breaks proactively. Recognising the inefficiencies of current processes, where the resolution of trade discrepancies often involves manual communication and guesswork, we’re leveraging artificial intelligence (AI) and historical data analysis to predict and manage trade failures. By integrating enhanced monitoring and exception management, this adds crucial context to trade data, allowing for a more accurate diagnosis of where and why a trade might fail. This innovative approach provides an understanding of the specific conditions leading to trade disruptions. By analysing past trading volumes and incorporating real-time feeds, OSTTRA can forecast spikes in trading activity and pre-emptively address potential issues. This proactive and context-rich method marks a significant advancement in post-trade processes, reducing settlement risk and operational inefficiencies, and ultimately providing a more reliable and transparent trading environment.
We are also enhancing the synergy between pre-trade and post-trade services by expanding the asset classes supported by our sophisticated pre-trade limit checking service initially designed for interest rate swaps and credit default swaps. This service ensures low-latency risk checks are performed before orders are sent to the market, helping to address a client’s regulatory requirements and minimising potential risks. Developed in response to the CFTC Dodd-Frank requirements and EU regulations for MTFs, this unique solution has been operational for over a decade, continuously evolving to support additional asset classes such as FX. By integrating pre-trade and post-trade services, OSTTRA aims to provide a comprehensive end-to-end solution that significantly enhances transparency and operational efficiency. This integration allows for seamless monitoring and management of trades throughout their lifecycle, from order initiation to settlement, ensuring a high level of accuracy and reducing the risk of trade failures.
TTI: Looking ahead, what role might distributed ledger technology (DLT) and decentralised finance (DeFi) play in the future of post-trade?
JD: We continue to maintain a watchful eye on the developments in DLT, blockchain and DeFi, recognising their potential while remaining cautious about adopting these technologies until they are fully production-ready. In contrast to many industry peers who have proposed various blockchain use cases that are not yet ready for real-world application, OSTTRA has identified a practical and viable use case for blockchain in change of ownership scenarios. This particular use case is advantageous as it circumvents the common issues of latency and throughput, providing a more efficient solution.
By utilising an extensible architecture, OSTTRA is prepared to leverage blockchain technology in a manner that is both practical and forward-thinking. This approach not only addresses current operational challenges but also positions the company to explore and integrate other asset classes in the future. As blockchain and DeFi technologies continue to evolve, we remain committed to evaluating and implementing these innovations in a measured and strategic manner, ensuring they meet the rigorous demands of production environments.
TTI: Thank you both.
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