White paper calls for industry-wide engagement and collaborative rearchitecture of core processes to avoid siloed solutions based on different standards
The Depository Trust & Clearing Corporation (DTCC), the premier post-trade market infrastructure for the global financial services industry, today issued a white paper that calls for industry-wide collaboration in leveraging distributed ledger technologies to modernize, streamline and simplify the siloed design of the financial industry infrastructure and address certain limitations of the current post-trade process.
“The industry has a once-in-a-generation opportunity to reimagine and modernize its infrastructure to resolve long-standing operational challenges,” said Michael Bodson, President and CEO at DTCC. “To realize the potential of distributed ledger technology in a responsible manner and to avoid a disconnected maze of siloed solutions, the industry must work together in a coordinated fashion.”
The paper, titled “Embracing Disruption – Tapping the Potential of Distributed Ledgers to Improve the Post-Trade Landscape,” notes that while today’s financial market infrastructures have a proven track record of providing stability, reliability and certainty, they are often quite complex, siloed and not equipped for 24/7/365 processing. DTCC believes a secure distributed ledger, with complete and traceable transaction history for a set of assets that is shared and accessible only between trusted parties, could provide significant operational improvements as well as further mitigate risk and reduce post-trade costs.
Based on its research and analysis, DTCC recommends exploring targeted opportunities to improve upon the existing infrastructure in certain defined areas where automation is limited or non-existent and where the technology provides a clear benefit over existing processes. Opportunities to explore include: master data management; asset/securities issuance and servicing; confirmed asset trades; trade/contract validation, recording and matching for the more complex asset types that currently do not have strong existent solutions; netting and clearing; collateral management; and, longer term, settlement.
However, the white paper cautions that distributed ledger technology is still immature and unproven, has inherent scale limitations in its current form, and lacks underlying infrastructure to cleanly integrate the technology into the existing financial market environment. As a result, it may not be the solution to every problem and alternative solutions should also be considered in evaluating opportunities to lower the costs and risks of current infrastructure through standardized industry workflows and expanded use of cloud technologies.
Industry-Wide Coordination and Collaboration
The paper also notes that research efforts thus far have been generally uncoordinated and, as a result, the industry is at risk of repeating the past and creating countless new siloed solutions based on different standards and with significant reconciliation challenges. The most logical way forward is for the existing, regulated and trusted central authorities to help play a leading role in introducing the standards, governance and technology to support distributed ledger implementations. Furthermore, we believe these organizations, working in partnership with a wide range of the industry, can help ensure that new opportunities are in the best interests of post-trade processing and consistent with long-standing goals of mitigating risk, enhancing efficiencies and driving cost efficiencies for market participants.
“The current approach of many firms experimenting in private with a technology that uses consensus protocols to provide transparency could lead to a new post-trade environment with the same integration and reconciliation problems that companies face today,” Bodson said. “As an industry-owned and governed financial market utility with more than 40 years of service, DTCC is uniquely positioned to help lead the effort in exploring how distributed ledger technology can simplify or replace legacy post-trade systems.”
As part of its commitment to progressing distributed ledger technology in the post-trade space, DTCC recently made a financial investment in Digital Asset Holdings, LLC, a developer of distributed ledger technology for the financial services industry, and Bodson will sit on the company’s Board of Directors. This investment positions DTCC to play a leading role in fostering industry-wide collaboration and helping to introduce the standards, governance and technology to support distributed ledger implementations.
DTCC has also joined the Linux Foundation, a nonprofit organization enabling mass innovation through open source, to support a new venture known as the Hyperledger project, a collaborative effort to advance the Blockchain technology. This relationship will enable DTCC to play a leading role in creating the governance and standards for the technology and ensure it is open source and based on collaboration.