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5 blockchain applications for capital markets

  • Slowly but surely blockchain applications are being tested in capital markets.
  • For the technology to take hold, a wholesale change to the infrastructure and value chain is needed.
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5 blockchain applications for capital markets

Distributed Ledger Technology might has the potential to change many of the processes in financial markets. The technology promises speed, security and much lower IT costs.

However, for the technology to take hold, a wholesale change to the existing financial services infrastructure and value chain will be needed, notes a recent report by Celent and Misys that explored the use cases of DLT for capital markets. Not many use cases have moved past beyond the proof of concept, but the pilots and projects that are on the way show the potential of the nascent technology. 

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Credit derivatives

Credit derivatives transfer loan risk to a third party. This is a huge market. According to the Bank of International Settlements, global OTC derivatives reached $544,052 billion of notional amount outstanding. This market has a very complex post trade processes that will benefit from cost reductions and efficiencies from successful implementation of DLT.

In April 2016, a working group including Bank of America Merrill Lynch, Citi, Credit Suisse, JP Morgan, the DTCC, Axoni and Markit announced it had successfully tested a permissioned, distributed P2P network for single-name credit default swaps. The transaction used smart contacts to manage terms and event processing.

Cash equities clearing

Using DLT for clearing and settlement can accelerate the settlement cycles and optimize management of capital and risk. In January 2016, the Australian Securities Exchange announced it will work with Digital Asset Holding to design  a new post-trade solution based on DLT for the Australian equity market.

Repurchase agreements

Repurchase agreements, where one side sells a security to another with an agreement to buy it back later, plays a crucial role in providing liquidity to capital markets. The current process includes negotiating and settling the purchase though inter-dealer brokers and the Fixed Income Clearing Corporation in a 2 step approach, which is both costly and time consuming.

Using DTL infrastructure would ensure dealer confidentiality, reduce latency, operational risk, and overall settlement obligations.

In march 2016, the DTCC announced a proof of concept DLT solution to manage the clearing and settlement of U.S. Treasury, Agency, and Agency Mortgage-Backed repurchase agreement transactions.

Syndicated loans

A syndicated loan is a loan funded from multiple lenders and is meant to simplify the loan process rather than have multiple bilateral loans. Multiple types of loans can be grouped together in one syndicated loan agreement. In addition, such loans can be sold to other parties. An agent bank is appointed by the lenders to administer the loan, which is a herculean task that includes calculations of disbursements and reconciliations, movement of assignment of ownership and agreement revisions.

Applying DLT can help automate the role of the agent, as well as keep track of the full chain of ownership of the loans.

Ipreo and Symbiont announced they are integrating Ipreo’s loan settlement platform and Symbiont’s smart contracts to deliver fully-automated settlement and maintenance for syndicated loans.

Private company securities

Managing equity in private securities includes many processes that will benefit from DLT, including investor administration, documentation and selling equity in secondary markets. DLT can assist with improved levels of transparency, compliance, and trust.

In December 2015, NASDAQ announced that Chain was able to use its Nasdaq Linq blockchain ledger technology to successfully complete and record a private securities transaction. NASDAQ stated this reduced settlement time and eliminated the need for paper stock certificates.

BNP Paribas is designing a pilot scheme with SmartAngels permitting private companies to issue securities on a primary market with e-certificates and access to a secondary market via blockchain technology.

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