The Chain-Ability Effect

Blockchain proposes a great technological concept; data is synchronized across organizations and geographies in a seamless manner while keeping the data immutable. So much has been discussed around this technology and its “brushfire” rush to adopt it, but not a lot is being said about the macro concept that the technology stands for- seamless interaction between financial participant, vendor systems, and other added value services to the financial industry. We will explore what steps can be taken to achieve the same macro concept of synchronization before Blockchain’s full implementation and adoption.

Choice, Competition & Open Access - These are the 3 pillars of what the financial market infrastructure needs to stand by. Unfortunately, these pillars are non-existent in the market infrastructure today. So, it's obvious to anyone in the system that we all want to have choice, competition, and open access, but the legacy technology currently serving the industry are either too inflexible to provide this capability or too expensive (even internal costs) to provide any meaningful simplification and synchronization between the platforms.

No Reconciliations - One of the main benefits of Blockchain is the reduced need for reconciliations between platforms, vendors and participants. Keeping one record of a trade or a component of a trade, including reference data, is a great benefit. However, in order for ONE record to be adopted by multiple participants, full scalability needs to be implemented. All market participants need to be included and be allowed to participate in one immutable record and this scale will take time. In the meantime, constant and fanatic efforts to reconcile books and records of multiple constituents continue to place costs and operational risks on the market infrastructure participants. Can these issues be alleviated in any other way? Yes! Another way of addressing them is to get over the hurdle of sharing data that is not crucial or detrimental to the market participant. A centralized data repository that would be accessed seamlessly by market participants would be a great stepping stone to achieving this functionality before a full-scale adoption of the Blockchain technology infrastructure. With data in one place, several methods and algorithms could be implemented to constantly update and cleanse the relevant data.  An additional step would be to populate and agree/match trade data fields at the time of deal capture. This will further reduce the need for reconciliations.

Frequencies of Processes - One of the main benefits of a homogenous ecosystem that would reduce the need for reconciliation and increase the quality of data would be the new ability to seamlessly integrate disparate systems. This way, processes such as margin optimization and other collateral related activities for example, can be utilized more frequently. Margin optimization processes, sometimes referred to as compression services, are difficult to coordinate due to latency issues and are a large cause for operational burdens on market participants. In this example, different timing of the processes execution requires additional reconciliation efforts and a considerable operational effort to synchronize all of the results of the process. A new synchronized ecosystem would reduce the operational burden and provide similar results to implementing Blockchain. This means that advancements of the technology capacity to finalize compression runs faster, more frequent instances of the runs could benefit market participants greatly. More frequent and immediate activities will lead to better hit ratios for success in trading, processing, and reporting which in turn will allow for immediate reporting requirements, thereby satisfying new regulations such as MiFID 2.

New Use Cases - The establishment of a synchronized ecosystem for market infrastructure participants present opportunities to create new use cases that were not achievable until now. An example of a new use case would be trade portability between one clearing house to another. A fully integrated ecosystem will allow immediate trade termination, novation, clearance, and reporting on trades from one venue to another. Other use cases could be around trade settlement, payments, and other features that have so far been ignored or underserved due to the fragmented ecosystem we currently operate under.

Cost Parity Between Nodes - Finally, we believe that the creation of a synchronized ecosystem using Blockchain, or just the centralization of integration efforts as described above, would naturally create a parity in terms of the cost and price of services across the industry. Simply put, this type of eco-system would create pricing power for its users rather than the leverage that vendors and service providers currently have. A better product could support a higher price if users put a value on its advantages, while an inflexible, lower quality product would not and thus be pushed out of the system in a natural way.

A synchronized, seamlessly integrated ecosystem to support the market infrastructure space would provide a stepping stone for Blockchain adoption and a hedge in case this adoption fails. Lower cost, higher level of products and services, and an open platform are great possible outcomes to this effort. However, effort is the key word. We cannot let Business As Usual cloud the main goals we all strive for.