Few people would deny that DLT is one of the most exciting trends in the trading space. But with numerous different perspectives, what’s clear is that despite the appetite and ambition in the market, there is still some way to go before the technology becomes incumbent.

“It’s a disruptive topic – we’re talking about removing some of the intermediaries out of the chain,” warned one of the panellists at a session entitled ‘Old kids on the block: What blockchain technology means for traditional financial instruments and trading.’ 

One of the key points of contention in the session was the definition of terms – highlighting the early starting point at which the industry remains. 

“DLT is not blockchain. It is the next step,” clarified one panellist. “Instead of having silos of data in many places, you can just have one ledger. It’s a layer than allows you to share immutable data between the parties that you trust. Usually, people draw a parallel between blockchain and DLT, but in fact it’s a subset of DLT. The way transactions are validated is by adding blocks to the chain. DLT is wider than that. It has vast applications – across CBDCs, post-trade – there is a lot of opportunity and there has been a lot of progress, but we still have a long way to go.”  

One of the biggest benefits of DLT, the panel agreed, was that everyone sees the same data at the same time. That increases trust, but it also brings its own issues – not least, because the end of the line could see a loss of data ownership. If data belongs to everyone, then it belongs to no one – and those who currently make money from owning data may not be so keen on that pathway.  

Pros and cons aside however, it looks as if there is no stopping progress. In a poll of the audience, 45% said their firm had already invested in tokenised bonds of equities, because the token economy and DLT will play a major role in the future; while 20% are working on a new product process to get it done soon.  

The panel noted that the key benefits of DLT for the current traditional trading model would be seen first for the buy-side: including a compression of the trade lifecycle, meaning that the speed with which they can redistribute their assets should increase, making things more efficient. “With the move to T+1, it’s estimated that up to 40% of capital could be redeployed,” said one panellist. “Imagine what atomic, T+0 settlement could do for the industry?” 

Interoperability is another key topic in the field of DLT, while the panel agreed that standardisation would be an important creator of efficiency in the traditional industry so will also be key when we talk about tokenisation and digital assets.  

Identifiers will also be crucial. “A new digital identifier is now being included in identifier fields within the FIX protocol,” explained one panellist. “A specific security type – digital – has also been added to FIX, which will be useful when distinguishing between different types of assets. A combination of identifiers may have to change to make this work, and all that is being built into FIX to help people do that.” 

Data is the new gold for the traditional industry, but it’s also key for digital assets. “We need data in real-time, on a millisecond basis,” said a panellist.  

Overall, the conclusion was that though the potential is immense, there is still much work to be done before traditional trading protocols can truly benefit.  

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The distributed ledger repo (DLR) platform builds on the success of multiple pilots with buy- and sell-side firms, including Natixis and Societe Generale, and will enable firms to agree, execute and settle repo transactions on a decentralised platform.

The move could potentially transform the repo market, where firms have historically swapped high-quality collateral for cash on a bilateral basis, as it will utilise smart contracts to transfer ownership of underlying securities without the need to physically exchange.

According to the FinTech giant, the DLR platform has executed $31 billion in average daily volume in the first week since its launch.

“This is the first step in the transformation of the $10 trillion global bilateral repo market using smart contracts and distributed ledger technology,” said Vijay Mayadas, president of capital markets at Broadridge.

“Co-innovating with market participants, we are able to bring solutions to our network of clients that create the next level of operational efficiencies. Within the repo market, distributed ledger technology and smart contracts have shown that they can play an instrumental role in driving efficiencies, reducing risk and enhancing liquidity while leveraging the existing legal and account frameworks.”

Leveraging Broadridge’s leading fixed income trade processing platform, DLR utilises smart contracts from Digital Asset as well as VMware Blockchain, a highly scalable distributed ledger platform. DLR reduces operational risk and settlement cost for repurchase, or repo, agreements by providing a secure record of repo trade details, reducing the need for reconciliation and removing obstacles to straight-through-processing.

“By coupling emerging technologies like distributed ledger technology and smart contracts with existing operational account structure functionality, Broadridge has enabled real-time securities mobility in the repo market,” said Vinod Jain, senior analyst at Aite Group. “This is a powerful value proposition for firms, especially those looking to reduce risk and enhance operational efficiencies.”

Blockchain has been frequently tested by banks and technology firms to improve the repo trading infrastructure. In December, JP Morgan revealed it completed an intraday repo transaction using its custom-built blockchain platform, Onyx, following tests completed with Goldman Sachs and BNY Melllon.

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Hiom leaves ASX to further his interest in FinTech and blockchain technology, and will be joining Motive Partners, a global investment firm focused on financial services technology companies, as an industry partner.

He will leave the organisation on 1 July.

“Peter has made a significant contribution to Australia’s financial markets over many years, first at SFE and then ASX, including the past 11 years as deputy CEO,” said Dominic Stevens, ASX managing director and CEO.

“Peter is a strong advocate for embracing new technology to deliver innovation and efficiency across our industry. This is best exemplified by his leadership of the investigation and adoption of distributed ledger technology to underpin the replacement of CHESS. We thank and congratulate Peter on his service and wish him the very best.”

ASX became the first stock exchange to commit to using DLT to replace its post-trade systems in 2016, but the project has been delayed on multiple occasions.

In August, The TRADE reported that 91% of CHESS users said they would be ready for an April 2022 go-live. Users that plan to connect to the new system include clearing and settlement participants, product issuer settlement participants, custodians, back-office software developers, payment providers and share registries.  

Group executive, Tim Hogben, will take on executive responsibility for the delivery and governance of ASX’s CHESS replacement project. Hogben has been involved in the project since its inception, assuming day-to-day management and oversight when the project transitioned from the design to delivery phase in October last year.

The project remains on track for go-live in April 2023.

“ASX has a long history of innovation in financial markets and it has been a privilege to have been part of this journey. The company is well positioned for the technology-driven opportunities ahead, and I thank our customers and everyone at ASX for their hard work and support over the years. These are exciting times in global financial markets and I look forward to continuing to play a part in shaping the industry’s future,” said Hiom.

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The exercise between Credit Suisse and Instinet occurred at 11am Eastern Time (ET) and settled at 4:30pm ET, demonstrating the ability for firms to execute and settle trades conducted throughout the day. 

“Innovation in blockchain technology is incremental. We’re excited to make progress in forging a path to faster settlement times at lower costs in public equities,” said Emmanuel Aidoo, head of digital assets markets at Credit Suisse.

“These advancements will ultimately benefit the broader market as more firms join the platform. We’re pleased to work with Paxos and Instinet to advance this technology, which will help unlock capital, increase liquidity and reduce risk over time.” 

The move comes at a polarising time in the US equities market where experts and commentators have fiercely debated the merits of T+0 settlement versus T+1, following the GameStop and Robinhood incident earlier this year which has ramped up market pressure on reducing settlement times.

The saga resulted in widespread calls – led by Robinhood’s CEO – to consider a T+0 settlement; however, this has been quickly rejected by the DTCC and other industry experts due to the removal of liquidity and risk-mitigating benefits of the netting system currently in place.

DTCC has since released a two-year industry roadmap for shortening the settlement cycle for US equities to one business day after the trade is executed.  However, Paxos has proclaimed that a more modern market infrastructure that utilises blockchain technology will be able to overcome the inherent inefficiencies and costs in the trade lifecycle. 

“Settlement in US equities is opaque and laden with unnecessary delays, capital costs and expenses. We are working hard to improve settlement for the benefit of all market participants,” said Charles Cascarilla, CEO and co-founder of Paxos. 

“An upgraded settlement system can create safer, fairer and more open capital markets that foster innovation. Modern technology makes the risks of the current system obsolete while also enabling greater trading liquidity with greater ownership transparency.”

Paxos Settlement went live with the service last year, with Credit Suisse and Instinet becoming the first two firms to join the platform.

The New York-based company claims it marks the first live application of blockchain technology for the US equities market and enables the simultaneous exchange of cash and securities to settle trades. Paxos launched the service under no-action relief from the US Securities and Exchange Commission (SEC), and it hopes to secure full clearing agency registration this year.

“We are committed to remaking the process of settlement in US markets. We’ll introduce significant financial benefits and achieve operational efficiencies with blockchain technology that will facilitate an open financial system. With Paxos, all market participants stand to benefit from improved settlement,” added Cascarilla.

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The intraday repo trade was settled instantly on the Onyx blockchain platform and swapped digitised US treasury bonds for JP Morgan’s dollar-backed cryptocurrency known as JPM Coin.

JP Morgan said blockchain technology facilitated the instantaneous settlement and maturity of the repo transaction in hours rather than days and creates new ways to access intraday liquidity.

“The current repo market has some technical inefficiencies, and we identified blockchain technology as a way to reduce our clients’ intraday risk profile,” said Scott Lucas, head of markets distributed ledger technology (DLT) at JP Morgan.

“By deploying blockchain, we created new opportunities to streamline operational processes and accelerate settlement for repo. Our new solution will help unlock trapped pockets of liquidity for intraday use and allow for reduced risk profiles for our clients and JP Morgan.”

JP Morgan developed the blockchain platform via its new business unit Onyx which is dedicated to scaling and commercialising the technology, focusing on products and services with its JPM Coin. The bank completed a simulation of trades similar to the repo transaction using blockchain with Goldman Sachs and BNY Mellon as the triparty agent.

“This is an exciting project which vividly highlights where enterprise blockchain can address a real-world problem in the financial system and we look forward to going live in early 2021,” said Mathew McDermott, global head of digital assets at Goldman Sachs.

Investment banks, asset managers, and exchanges globally have increasingly explored using blockchain technology for trading and settlement processes.

In June, Vanguard collaborated with blockchain specialist Symbiont, BNY Mellon, State Street, and Franklin Templeton on a blockchain pilot for FX forwards trading. The pilot demonstrated that the forwards market could execute and document trades on a single unchangeable record while moving and settling collateral instantly.

Elsewhere, Commerzbank, Deutsche Börse, and MEAG completed settlement of secondary market repo trade with blockchain technology using delivery versus payment and transfer of tokenised cash.

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Rutter has founded a new company, known as LedgerEdge, that aims to bring the latest technologies to institutional-grade trading services and protocols in the corporate bond market.

LedgerEdge is using blockchain technology, artificial intelligence and secure enclave computing to help traders seek liquidity on the platform, find and share data, and execute trades in one ecosystem. The new platform will operate as a multilateral trading facility in the UK, and will obtain licenses to operate in the US.

“The secondary market for corporate bonds is growing and is ripe for an evolution, but existing platforms are not fit for purpose,” Rutter commented. “Data is monetised by platforms and it is leaked across fragmented, opaque markets, decreasing execution quality. Working with the industry, we will build a platform that solves the challenges of locating and promoting liquidity and data ownership once and for all.”

Rutter is considered an industry veteran after building other trading platforms for fixed income, including BrokerTec, which is now part of CME Group, and LiquidityEdge, which MarketAxess acquired last year for $150 million.

He also founded blockchain consortium R3 and will remain chief executive of the firm, while LedgerEdge implements a similar collaborative approach to R3 and work with market participants to adopt and test new technologies.

David Nicol, head of digital assets at R3, will lead the new LedgerEdge business as chief executive, while former ICAP veteran Ian Chicken becomes chief operating officer, and Bob Bose, who previously worked at NYSE Euronext and Santander, takes on the role of chief technology officer.

“The fundamental desire that all traders share is to execute efficiently and effectively, with minimal data leakage,” LedgerEdge chief executive, Nicol, said. “Difficult and persistent challenges such as these require a holistic approach and cross-industry collaboration.”

Finding liquidity and executing trades without data leakage were listed as key challenges that market participants face in the corporate bond market. The market is also behind other asset classes in terms of the adoption of new technologies and digital solutions, with just 30% of the $59 billion daily traded volumes being executed via electronic channels.  

“Illiquid areas of the corporate bond market have challenged participants for years,” Kevin McPartland, head of market structure and technology research at Greenwich Associates, said. “Innovative solutions that further expand data access while limiting information leakage will prove a key piece of the market’s next evolutionary stage.”

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The project recently completed a pilot whereby Vanguard simulated multiple 30-day FX forward contracts with the other industry players, in a proof of concept that tests how firms could trade OTC markets on a DLT network in the future.

“For more than two years, we’ve been developing blockchain use cases to help transform the capital markets,” said Warren Pennington, principal and head of Vanguard’s investment management FinTech strategies group. “The current environment emphasises the need to streamline, automate, and secure critical business processes. When procedures are highly reliant on manual intervention and disconnected operations, it makes the markets vulnerable to disruption from crises and even simple manual mistakes.”

Using blockchain technology, the firms added that the forwards market will be able to execute and document trades on a single, unchangeable record to digitally secure the transactions. Market participants can also value, move, and settle collateral instantly to reduce risk and streamline processes for the instruments, which are non-cleared and subject to margining.

“Our work towards conducting the first FX forward contract on a DLT is one of a number of use cases we are looking at in our efforts to modernise trade lifecycles and improve the client experience,” Jason Vitale, head of FX at BNY Mellon, commented. “We think this partnership with Vanguard is an important step for the FX market, further automating end to end workflows”

Vanguard has been working with Symbiont since 2017 to apply blockchain technology to data management processes. The investment firm looked to simplify the index data sharing process by moving the information onto a single decentralised databased.

“This platform is another example of how we’re transforming capital markets infrastructure through blockchain technology,” Mark Smith, CEO of Symbiont, added. “Vanguard is an example of a forward-thinking financial services institution that is helping accelerate necessary change in the FX markets. This is not just about innovation – but about bringing much-needed efficiency and automation to this asset class.”

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As part of the deal, the markets technology division at Nasdaq will use R3’s Corda Enterprise platform to support institutional grade, full lifecycle services for digital assets marketplaces.

Nasdaq said the platform will help to boost its capabilities to support clients and business cases requiring institutional grade controls in reliability and availability, due to the scalability, low-latency and encrypted nature of the software.

“This collaboration between Nasdaq and R3 is another important milestone in Nasdaq’s continuous development of technologies that support the creation and growth of dynamic, trusted digital asset marketplaces,” added Johan Toll, head of digital assets within the markets technology division at Nasdaq. “R3’s Corda platform will fit well into Nasdaq’s technology ecosystem and partnership strategy and allow us to harness the power of scalable design and a new level of interoperability.”

Cathy Minter, chief revenue officer at R3, commented that financial institutions are becoming increasingly aware of the demand and potential for servicing the needs of digital assets, with R3 able to accommodate with solutions designed to be secure and reliable in a regulated environment.

“Together with Nasdaq we will provide a world-class platform on which digital asset markets can be built, helping to rapidly accelerate the growth of these markets and others around the globe,” she said.

The new agreement with R3 follows Nasdaq’s move earlier this month to launch its new cloud-based data service which will provide clients with access to real-time exchange, index and fund data. The new business will run on Amazon Web Services cloud technology, to increase support, ease of use, agility and scale.

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Dorothy Copeland will support the ecosystem partners and lead its engagement while developing the firm’s sales through key vertical market industries. She joins R3 at a time of mass development, according to the firm, which has recently expanded its offices in London and Dublin. 

“R3 has differentiated itself as the clear leader in enterprise blockchain platforms, which have the potential to transform industries around the world,” Copeland said. “The opportunity for R3 is similar to the early stages of cloud when I joined AWS in early 2010 to build out their thriving ecosystem.”

At IBM, Copeland led the partner business functions across software, cloud, systems and services for over 80,000 solution providers. She was also on the board of top-performing IBM executives and was a member of the IBM acceleration team.

Prior to her tenure at IBM she held a senior role at Amazon Web Service, building up its global ecosystem programs from scratch and created the industry’s first infrastructure-as-a-service-focused channel, MSP and competency programs.

“She joins at an important juncture for R3, as we move on our work establishing Corda Enterprise as the go-to technology for the enterprise space, deepening our relations with our partners,” Cathy Minter, chief revenue officer at R3, commented.

The most recent high-profile hire at the blockchain software firm was Societe Generale’s Bryan D’Souza, who was appointed partner manager at R3 in Europe. 

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The report, authored by research analyst at Outlier Ventures Joel John, highlighted the benefits of basing blockchain projects in London, including its regulatory environment, simple corporate registration, as well as its proximity to Europe.

Many companies in the space have already established their roots in London, which maintains almost five times as many blockchain startups, compared to other established blockchain hubs such as Zug and Berlin.

One in three of the 450 blockchain companies headquartered in London are also able to raise funding, the research added, with a combined $503 million having been invested in London blockchain firms since 2013.

Last year, several firms heavily focused on blockchain technology expanded operations in London or won backing from major established institutions. Blockchain vendor R3 doubled its office space in London to facilitate an aggressive hiring plan, as it looked to add 40 new hires to its main office.

More recently, the London Stock Exchange Group led a $20 million funding round in blockchain firm, Nivaura, which provides a digital investment banking platform for banks, exchanges and other firms to automate manual processes with the technology.

Various exchange operators including the Australian Securities Exchange and Hong Kong Exchanges and Clearing, as well as larger banks, are also exploring implementing blockchain technology to post-trade, clearing and settlement processes.

Outlier Ventures’ report concluded that while almost 60% of all blockchain-related investments in London were in series A and B funding, the mortality rate is still high for startups. The conversion rate from seed stage to series A is 13% and only a mere 3% for series B. 

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