[ I N - D E P T H | B L O C K C H A I N ]
Blockchain had its first major foray into the clearing and settlement process with the announcement last December that the Australian Securities Exchange ( ASX ) will replace its legacy CHESS equity clearing platform with distributed ledger technology ( DLT ) developed by Digital Asset . Full deployment is set to go live by 2021 but participants are already taking note . While Digital Asset ’ s technology has not yet been proven to scale , the potential benefits are many . According to ASX , the technology should provide greater market efficiencies through better record keeping , reduced reconciliation , more timely transactions and enhanced data quality . “ The changes ahead will lead to innovation in new products being available to investors opening up further offerings and the potential for further offshore investment into Australia ,” says Johann Palychata , head of blockchain , BNP Paribas Securities Services , which is an investor in Digital Asset and consulted on the ASX project . “ This will provide the opportunity to challenge the inefficiencies in the end-to-end value chain and the removal of redundant processes making the market a lot more streamlined , efficient and flexible , especially in terms of timings and ability to change .” Palychata believes the project could set off “ a wave of similar projects elsewhere if the promises of the new technology are confirmed .”
A legitimate claim ? Beyond improving efficiencies — therefore reducing cost — proponents believe that the implementation of blockchain could enable central counterparties ( CCPs ) to develop new revenue generation opportunities . “ The immediate benefits of DLT to the mitigation of system risk , and the reduction of costs associated with the reconciliation
“ As DLT solutions move into production , we could start to see market operators and participants examining revenue generating opportunities .”
CHRIS CHURCH , CHIEF BUSINESS DEVELOPMENT OFFICER , DIGITAL ASSET
process are just the beginning ,” says Chris Church , chief business development officer of Digital Asset . “ As DLT solutions move into production , we could start to see market operators and participants examining revenue generating opportunities , such as the creation of new products and services , which are only possible because of shortened trade processing and settlement times .” Church says that Digital Asset is working with several other central security depositories ( CSDs ) and CCPs on deploying more blockchain projects . It is the “ single source of truth ” that blockchain provides which , he hopes , will reduce systemic risk . The push to blockchain is also likely to come from investors using central clearing houses . Palychata says institutional investor interest will grow when they have analysed how the new system could allow them to optimise their trading strategies and funding models , and how they can interact with exchanges to provide them with the available data in the quickest timeframe . The idea of cost reduction through an improvement in efficiency makes sense , but it has to be balanced with considerations of implementation expenditure . According to Suresh Kandula , director of technology at Sapient Global Markets , the initial costs of ASX ’ s DLT implementation are likely to be significant . “ If I have to compare this to equivalent North American platforms and what it would take to modernise those , it would be between three to five years and it could cost up to $ 150 million , possibly more ,” says Kandula . “ That figure does not include all the settlement banks , intermediary technology platforms and whole set of ecosystem of vendors to make changes to their own platforms , supporting newer interfaces and messaging standards . For example , as part of this project ASX is considering ISO2022 along with replacing or augmenting more expensive SWIFT messaging .” Furthermore , there is a likelihood of continued external costs . “ Because blockchain is based on open source , it can be less expensive ,” says Monica Summerville , senior analyst at Tabb Group . “ However , a lack of in-house expertise raises risks as the entity is more reliant on its outside providers , whether these are suppliers or consultants .” EuroCCP , the European equities clearing house , is currently looking at new approaches to solving post-trade inefficiencies with the use of DLT . Diana Chan , chief executive at EuroCCP , says the cost of DLT is likely to be similar to other technology integration . “ Our experience is that it is neither costlier nor cheaper than any other integration ,” she says . “ We have a modern development environment and blockchain services can be integrated in the same environment that we use for our regular IT development .” The company is still in the early stages of blockchain analysis but , says Chan , the hype around DLT has spurred FinTech innovation and is worth looking at . In future , she believes that DLT could be used to solve current post-trade inefficiencies , such as improving the collateral transfer process .
12 Global Custodian Summer 2018