Sibos 2017: How blockchain may transform capital markets

By Alex Hammond | 18 October 2017

In one of the most eagerly received announcements of Sibos 2017 so far, today Broadridge Financial Solutions revealed the successful completion of an operational test case which demonstrates the capabilities of blockchain technology to enhance the operational efficiency and auditability of bilateral repurchase agreements.

The pilot was conducted in collaboration with Natixis and Société Générale.

The pilot utilises distributed ledger technology capabilities to reduce operational risk for market participants by providing a secure record of repo trade details, reducing the need for reconciliation and removing obstacles to straight through processing. This new blockchain-enabled solution, which automates end-to-end processes, streamlines the repo agreement and confirmation processes, offers a faster and more accurate collateral substitution process, while eliminating time consuming manual interventions, and reduces counterparty risk while increasing auditability.

bobsguide spoke with Horacio Barakat, Vice President of Corporate Strategy atBroadridge, to hear more about the venture.

Why did Broadridge decide to pilot the operational test case for using blockchain to settle repo agreements?

Broadridge has a leadership position in the fixed income markets. We work with 18 of the 23 primary dealers in the US market, as well as supporting fixed income and other asset classes globally, so we see a lot of trading volume on our platform. That places us in a unique position to foster change and promote adoption of new technology concepts, in this specific case a blockchain solution, into that particular ecosystem.

The bilateral repo solution is the first step towards implementing improved solutions across much broader collateral management functionalities. With this purpose in mind, three partners decided to collaborate with us to create a new way of transacting bilateral repurchase agreements. We began working with those clients last spring, beginning with understanding what the pain points were for them and what we could do to solve those.Those conversations resulted in a decision to settle the entire cycle of a repo transaction using distributed ledger, from the capturing of the collateral though to capturing the contract terms and the repo transaction terms on a live basis.

During the pilot one party would enter a transaction and automatically it would appear on another party’s screen for approval, rejection, or modification, all executed in a distributed ledger.

Once  the transaction is executed, the distributed ledger would then follow a number of the activities during the lifecycle of the trade, ending with the return of the collateral.

The operational test provided great learning around the functionalities that we need to refine or add, but overall we proved to ourselves that the technology can definitely bring the operational efficiencies that we and our clients are searching for.

This is the first step in expanding the functionality into other areas, and most importantly providing a new foundation for collateral management. Once you have solved the movement of collateral rights in the distributed ledger, this can be developed further for the management of collateral functionality. But you cannot tackle that ultimate prize without solving the basics.

Is there a definite decision to pursue the roadmap you have set out with the operational test, and what would the timeline for doing so?

We are definitely going to pursue it. The timings are uncertain, but having proven the fundamentals of the technology’s functionality gives us great confidence that we are on the right track.

Will the next 12 months be the critical time for development of blockchain in fixed income markets?

We will no doubt be having a very different discussion about the use of blockchain in 12 months’ time. Instead of talking about proof of concept or operational test cases, we will be talking about full functionality and how we insert the technology into systems.

It is a very exciting time because the potential of this technology is very significant. We believe in the potential which is why we are investing heavily into it.

What would you say to the sceptics?

It is very difficult to predict where this blockchain technology will be used in two, three, or even five years from now, and what it will do to the capital markets industry. One thing that we believe is that it is definitely going to be disruptive and has the potential to completely change the way we do things. So even sceptics need to look at this more closely.

That is why the operational test cases we are working on aren’t just about the test cases in isolation. They are steps in much broader projects. We think this technology has the potential to ultimately transform capital markets and not just solve specific problems.