Editor’s note: This comment piece was submitted in response to Jon Macaskill’s column A Hillary Clinton moment for Blythe Masters.
|
Robert Palatnick, |
The question of how best to optimize the potential benefits of distributed ledger technology (DLT) is one of the most significant challenges facing the financial industry today.
The interest in DLT is driven in large part by the need among firms to increase operational efficiency and reduce expenses due to the ongoing challenges of low interest rates, balance sheet constraints, new regulatory mandates, prolonged macro-economic uncertainties and rising compliance costs.
Over the past 12 months, the overheated rhetoric about the transformative power of blockchain has been replaced by a more realistic tone. While there is still a great deal of excitement over the potential of this technology to re-imagine the current post-trade infrastructure, the industry is working more collaboratively on practical DLT solutions.
Several significant proofs of concept are being developed and tested, with the most promising initiatives moving forward.
At the same time, the industry has a deeper understanding of the need for integration, interoperability and best practices to prevent creating technology silos, which would lead to many of the same reconciliation and interoperability issues we face today.
This level of cooperation will help to ensure that proof of concepts can be scaled once these have been tested and momentum has started to build.
The industry would be well served to put aside its traditional competitive spirit and instead work together
DLT is, at its heart, a consensus technology, where we are seeing that even competitors are cooperating to improve efficiency to the benefit of all users.
After all, if we can securely enable multiple parties to simultaneously share real-time access to the same records and logs across the industry and appropriate counterparties, we can achieve greater operational efficiency and substantial operational risk/cost benefits for the industry.
As we have found at DTCC, no two use cases are the same even though they may share common objectives and benefits.
For example, both of the initiatives that we’re working on in credit derivatives and repos aim to reduce cost and risk, are highly scalable, and will use principles and standards outlined by the Hyperledger Project, the open source collaboration forum hosted by the Linux Foundation, of which DTCC is a member.
However, the similarities stop there. The projects are unique in terms of the number and type of participants, volume and type of transactions, and existing processes and practices as well as security and access considerations. As such, DTCC is working with different technology and consulting partners on these two projects, against different timelines, guidelines, metrics and objectives.
For the initiative to migrate our Trade Information Warehouse, a post-trade processing platform for approximately 98% of credit derivatives, onto a distributed ledger, we are working with an IBM-led consortium.
Collaboration
Because this is a complex, multi-stage project requiring a high degree of collaboration, we are drawing on the interaction of specialist capabilities and skillsets – with IBM providing programme management, Axoni providing the base DLT and smart contract application, and R3 acting as a solution adviser.
We are also engaging with key market participants and infrastructure providers to ensure the solution meets the unique needs of key stakeholders when it is launched in 2018.
At the same time, we are working with Digital Asset Holdings (DAH) to develop a DLT-based solution for the clearing and settlement of repo transactions. The goal is to enable DTCC’s Fixed Income Clearing Corporation to become the settlement counterparty for new repo transactions in real time, which will allow netting and offsets, thus reducing risk and capital requirements for market participants.
In the first stage, DTCC and DAH validated the concept of incorporating structured, cryptographic ledger entries into existing trade and settlement flows. We’ve now moved on to the second phase, which will bring together a working group to facilitate industry-level collaboration, design and validation as we continue to evaluate whether to move to implementation.
With so much activity occurring across the industry, it is critical that all parties place standards at the heart of their DLT initiatives – with open source seen as an essential building block.
In addition, regulated and trusted central authorities must work together to introduce the standards, governance and technology to support distributed ledger implementations. In partnership with regulators and the industry, these bodies can help ensure that DLT initiatives support broadly agreed goals, such as mitigating risk, enhancing efficiencies and reducing costs.
The optimism and excitement over blockchain reflects the tremendous potential of this technology, but during these early stages, the industry would be well served to put aside its traditional competitive spirit and instead work together to advance the use of distributed ledgers. It is not often that opportunities like this come around.
Robert Palatnick is managing director and chief technology architect at DTCC