Eugene Grygo, Chief Content Editor, FTF News
As this year gathers steam, the many blockchain/distributed ledger technology (DLT) projects out there are beginning to yield results. We have just reported on Northern Trust and its efforts with IBM http://bit.ly/2lSPlrw and I’m sure there are many more to come.
One of the more intriguing DLT projects is the joint effort between the old school post-trade infrastructure provider DTCC and the blockchain darling of the media, Digital Asset. Hoopla aside, their efforts appear to be achieving results.
DTCC officials report that they are moving into the next phase of their project targeting the netting process for U.S. Treasury and Agency repurchase agreement (repo) transactions. The pioneering repo system project, “has demonstrated for the first time the successful netting of ‘start’ leg repo transactions with prior end-of-day net securities obligations in the DTCC environment,” officials report.
As envisioned, the solution-to-come would enable DTCC staff to “calculate a new net settlement amount at a point in time and record it in an immutable, secure and transparent distributed ledger,” officials say. This record-keeping effort can then be used by the Fixed Income Clearing Corp. (FICC) for new net securities and cash obligations with its member firms. (Changes to FICC’s repo processing rules are subject to regulatory approval, officials add.)
In addition, there is a central counterparty process that benefits repo processing and uses standard accounting practices to increase liquidity and mitigate costs and risk, DTCC officials say.
While the FICC provides the matching and verification of repo transactions, only the “close” leg of same-day settling trades is netted and settled by the FICC with the “start” leg settling outside of the system, explain DTCC officials. “With this project, DTCC seeks to also net the ‘start’ leg, further reducing settlement risk and costs to members by allowing additional netting and offsets.”
With the first phase complete, the DTCC and Digital Asset are in Phase Two and as such will form a “stakeholder working group” culled from the ranks of leading market participants who are “active in the $3 trillion per day U.S. repo and related transaction market,” officials say. The DTCC wants feedback from the group to “ensure the solution is aligned with industry needs,” officials say.
The second phase will also help DTCC officials discover if the solution “meets the performance and integration needs of DTCC’s technology environment while allowing for integration with member firms.” Phase Two is slated to be complete by June 2017 and will help the DTCC decide whether or not to advance the project to the developmental phase of the effort.
For the moment, Michael Bodson, president and CEO of DTCC, says in a statement that the company is encouraged by the initial results, and that he “we see this project as another validation of the potential of this exciting, emerging technology.”
The biggest strength of DLT lies in “its real-time information-sharing capabilities, enabling all parties to quickly view repo details after trade execution,” Bodson says. “DLT helps mitigate risks and costs while enabling users to take advantage of the benefits of a central counterparty,” he adds.
While there has been a lot of speculation that the results of these semi-secret blockchain projects have been underwhelming, we might find that DLT lives up to the hype and more.
If true, that would be a stunning discovery.
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