VIDEO | DLT is opening up new possibilities in post trade that are getting the industry excited. The prospect of a more seamless custody process, real-time settlement, and a new way to document ownership is forcing us to rethink conventionally costly post-trade processes – but is the technology really living up to expectations? At the PostTrade 360° Nordic 2024 conference, the session titled “Conclusions: The promise of DLT across the links of the post-trade process” attempted to dissect the topic.
Despite Clearstream’s success with D7, its digital securities platform, Thilo Derenbach described the firm’s blockchain journey as having really started only with the European Central Bank’s (ECB) trials for wholesale central bank digital currency (wCBDC). The head of sales and business development for digital securities services at the CSD admitted that blockchain technology still needs to prove its worth.
“It wasn’t immediately obvious why we (market participants) had to jump into a new tech stack to deliver benefits that we can deliver to the individual market participants without using DLT,” Derenbach said. “It comes at a cost. It requires capacity and know-how within the organisations.”
He expressed his belief that no organisation represented by the audience of the session were “running their own node or managing their own infrastructure”. “The market is not, in our (Clearstream’s) perspective, ready, at least in the environment we operate in, which is servicing institutional financial intermediaries.”
Currently, usage of DLT appears to be “all about issuance, not so much the follow-on processes of settlement, custody, asset servicing, reporting, or collateral management”. He acknowledged, however, that the situation might look very different for the retail or private markets, and might be starting to change even within the institutional space.
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Small steps
As the vice president of digital innovation capital markets at Broadridge, Horacio Barakat sees things differently. He believes that his firm has “found the right utilisation of the technology” and areas where his team can “provide significant value to clients”.
One example is Broadridge’s Distributed Ledger Repo (DLR) solution. Launched in 2021, it allows transactions “to be settled by the minute”. Barakat revealed that the platform is now operating at “institutional scale”, “processing US$1 trillion in notional every month”.
But technology doesn’t have to make this big of an impact for it to be significant – “You don’t have to be that transformational,” he pointed out. An example is smart contracts, which have been embedded in Broadridge’s technological stack, becoming an invisible part of the matching engine that clients use, but barely think about.
“The beauty of the technology is that you can be highly transformational with it when you want it and when the use case deserves it, but it’s also an elegant way to solve problems without clients necessarily knowing that you’re using them,” Barakat added. “You don’t have to make it your entire personality.”
The liquidity debate
One factor hindering the take up of DLT could be the lack of liquidity. Hannah Meakin, solicitor at Norton Rose Fulbright questioned whether “legal and regulatory developments are supporting the development of liquidity as well as they could be”.
Citing regulatory regimes that require firms to be located in the jurisdiction to provide crypto asset services, and restrictions on the amount of exposure to crypto assets that banks and other financial institutions are allowed, she said, “Some of these things, although they’re all done for good reasons, don’t necessarily take into account the fact that they are not supporting the development of liquidity in particular systems or particular assets… Sometimes, other considerations outweigh the ability to support liquidity, but we all know that without liquidity, these systems are not going to get very far very quickly.”
Katie Emerson, EMEA head of agency lending and collateral management sales at JP Morgan suggested a second layer to the liquidity issue. “Banks don’t want to receive assets as collateral unless they know they can do something with them.” It is therefore necessary to think beyond “trophy transactions” and consider how to make the whole value chain usable.
A deeper issue
Derenbach pointed out the irony that many forays into DLT have started with bonds – “one of the most liquid instruments that we already have”. The root problem, he thinks, isn’t with liquidity, but with the technology’s cost saving and efficiency potential.
“Clients want to go into the new technology because they see the cost saving and efficiency gains that they can make. They migrate into the new environment but need to find the same sort of environment as they have in the traditional world – i.e. they need that liquidity.” Unfortunately, the current lack of interoperability between platforms is hindering these efficiencies from being realised. “As an industry, we must come together to create standards for easier interoperability or the ability to move an asset on chain, which will in turn, create liquidity.”
In response, Barakat “respectfully but violently disagree”. “Liquidity on chain is happening today and we are living proof that it is happening,” he said, referring to Broadridge’s work. “You can immobilise collateral on our platform. We allow that tokenised immobilised collateral to be transacted and rehypothecated as many times as you want in real time right. That is liquidity for the asset that you hold; that’s the definition of liquidity – to be able to move collateral around as fast as you want. And it’s happening today, at scale.”
Expectations versus reality
Derenbach doesn’t believe that things look so rosy in practice. “We’ve seen single issuances of securities on-chain. They stay there until redemption – that is the reality,” he countered. “That’s not good enough.” But if the liquidity issue could be solved, along with improved efficiencies in asset servicing, he estimated that DLT take up might grow in 24 months.
Barakat has a more optimistic view. “If your concept of adoption is that digital assets are going to take over the world and lead to the hype we saw in 2018 or 2019, that the brokers are going to go out of business and custodians are going to disappear into thin air, never in a hundred years (might it ever happen),” he retorted. “But that doesn’t have to be the case. The technologies here; digital assets, tokenisation, smart contracts are here, at scale, in production. And if you have realistic expectations of true platforms that actually add value to the capital markets industry to reduce cost, increase velocity, and make the lifecycle of a bond much more efficient, it’s here. It’s not two years away. It is happening right now.”
Panelists:
Horacio Barakat, Vice President of Digital Innovation Capital Markets, Broadridge
Katie Emerson, EMEA Head of Agency Lending & Collateral Management Sales, J.P. Morgan
Thilo Derenbach, Head of Sales & Business Development, Digital Securities Services, Clearstream
Hannah Meakin, Solicitor, Norton Rose Fulbright
Moderator:
Colin Parry, CEO, International Securities Services Association
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