DTCC and Digital Asset Holdings to Test Blockchain Solutions for the $2.6 Trillion Repo Market
Depository Trust & Clearing Corp. (DTCC), a firm at the center of Wall Street’s trading infrastructure, is about to launch an important test of distributed ledger technology: seeing whether it can provide workable solutions for the $2.6 trillion repo market, The Wall Street Journal reports.
DTCC will collaborate with Digital Asset Holdings for planning and running the test. Earlier this year, DTCC participated in a $52 million funding round for Digital Asset Holdings, with other investors including JP Morgan, Citi, Accenture, CME Group and ASX, the company behind Australia’s stock market.
A repurchase agreement (repo) is a form of short-term borrowing for dealers in securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day. Repos play a critical role in the financial system by keeping cash and securities circulating among hedge funds, investment banks and other financial firms.
DTCC, established in 1999, focuses on post-trade financial services, providing clearing and settlement services to the financial markets. It provides central custody of securities and ways for buyers and sellers to make their exchanges in a safe and efficient way. In 2011, DTCC settled the vast majority of securities transactions in the United States and close to $1.7 quadrillion in value worldwide, making it by far the highest financial value processor in the world.
In a joint press release, DTCC and Digital Asset Holdings announced plans to develop and test a distributed ledger-based solution to manage the clearing and settlement of U.S. Treasury, agency, and agency mortgage-backed repo transactions. Repo agreements were selected for this proof-of-concept because there is an opportunity to streamline how these products are cleared as repo transaction volumes continue to grow.
“Distributed ledger technology has the potential to revolutionize certain post-trade processes that are inefficient and complex, and repos are a great place to start,” said Mike Bodson, President & CEO of DTCC. “There are absolute opportunities to make clearing in this area much more efficient, and we look forward to working with Digital Asset on this exciting project. This initiative reflects our strong commitment to leverage this technology and help lead the industry to further lower risk and increase efficiency across financial markets.”
DTCC and Digital Asset will add cryptographic ledgers to existing securities trade and settlement flows. According to the companies, the project will demonstrate how market participants will be able to create and interact with a ledger of obligations and positions which evidence matched securities transactions, including normal trading activity and repo agreements. Distributed ledger technology was chosen for its real-time information sharing capabilities, which will enable buy- and sell-side firms to agree to repo trade details much more quickly, lowering risks and costs.
“This collaboration further demonstrates Digital Asset’s commitment to enhancing post-trade processes for financial market infrastructure providers and market participants,” said Blythe Masters, CEO of Digital Asset. “DTCC has an important role to play in the integration of a distributed ledger ecosystem with the existing financial landscape, and this joint effort will accelerate innovation while decreasing cost and risk for our clients.”
Masters, a financial superstar, was appointed CEO of Digital Asset Holdings last year after a long career at JPMorgan. In 2015, Digital Asset Holdings acquired blockchain companies with innovative technologies and became a founding premier member of the Linux Foundation’s open source Hyperledger Project, to drive the adoption and standardization of distributed ledger technology.
DTCC is also a member of the Hyperledger project.
“As a member of Hyperledger, DTCC is helping to play a leading role in creating the governance and standards for distributed ledger technology,” said DTCC Managing Director and Chief Technology Architect Robert Palatnick in a recent Hyperledger Project update issued by the Linux Foundation. “Our goal is to ensure that new opportunities are in the best interests of the post-trade process and consistent with our long-term goals of mitigating risk, enhancing efficiencies and driving cost reductions for financial market participants. Open source and industry-wide collaboration are essential to realizing the full potential of distributed ledger technology and to avoid creating a disconnected maze of siloed solutions.”
“Working with DTCC is much easier than going to talk to all the participants in the repo market separately and persuading them to adopt a new technology,” added Masters in an interview quoted by The Wall Street Journal.
The move indicates that distributed ledger technology is on its way to becoming an important part of tomorrow’s fintech, and there’s no turning back. The first phase of the DTCC and Digital Asset repo project will start immediately, developing a proof-of-concept and integrating it into the DTCC environment. Future phases will include collaboration and testing with market participants to ensure the solution meets industry needs. Then, as reported by The Wall Street Journal, DTCC plans to deploy blockchain technology to other markets outside of repos.
The detailed development and implementation plan hasn’t been disclosed, but it’s worth noting that Digital Asset Holdings and the Linux Foundation seem to support closed, “permissioned” blockchains that don’t carry Bitcoin as a currency.