Banking News

JP Morgan using blockchain for automated derivatives margin payments

derivatives trading

Yesterday Baton Systems announced that together with J.P. Morgan it developed a distributed ledger-based solution for derivatives. It enables real-time movement of cash as well as collateral transfers.

For some time, Baton has been using distributed ledger technologies (DLT) for post-trade and payment solutions targeting financial institutions. Its core platform integrates with existing legacy infrastructures rather than getting banks to replace them.

Currently, the delays in transferring collateral used for margin calls mean that excess funds are tied up. The new system helps to integrate collateral custodians with existing treasury systems.

“The technology we have developed reduces the time needed to process the entire collateral workflow from hours to near real-time,” said Anthony Fraser, Head of Global Clearing Operations and Trading Cost Management at J.P. Morgan. “We’re already seeing faster, more efficient payments, reconciliation and reporting for all parties in the collateral lifecycle.”

Baton Systems CEO, Arjun Jayaram said that it “removes the need for manual intervention in the collateral process by integrating with financial institutions’ collateral and cash systems, leaving their existing processes and systems in place.”

The announcement states that “the new solution also synchronizes and accelerates the collateral substitution process associated with two legs of that process; e.g., cash vs collateral, currency vs currency, or collateral vs collateral.”

The roadmap going forward is scaling across more global clearinghouses and adding new functionality, including more complex clearing arrangements.

A year ago, Baton Systems won a Barclays Hackathon which focused on derivatives body ISDA’s Common Domain Model (CDM) for derivatives. The CDM is an industry standard for derivatives processes – such as amendments, clearing, margining – rather than just data. Shortly afterwards Baton said its platform supported the CDM.

At that time it appears it was quite far down the road towards today’s announcement because it said that clients could connect existing swaps and derivatives systems to the Baton platform. And it already had deployed its platform to several global banks for settlement of margin collateral and foreign exchange using conventional bank accounts.

Two months ago, the Californian startup secured $12 million in Series A funding led by Trinity Ventures and including Alsop Louie and Commerce Ventures.

While we suspect (awaiting confirmation) the Baton Systems platform may not use J.P. Morgan’s Quorum technology, the bank’s end of it might.

The ability to manage collateral in real-time is attracting the attention of the blockchain sector. One of the biggest is the HQLAX / Deutsche Börse initiative to improve collateral mobility which is expected to launch within weeks. IVNO recently ran a tokenized collateral trial with DBS, Natixis, Raiffeesen and many others, although the project it is at an early stage compared to HQLAX.

J.P. Morgan has been grabbing headlines of late. This week it was revealed that the bank was working with the Monetary Authority of Singapore (MAS) for the fifth phase of Project Ubin. It involves a trial integrating central bank digital currency (CBDC) with private coins such as the JPM Coinf or multi-currency payments and used Quorum.


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