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Sometime back we wrote about Blockchain Technology and its potential role in the Capital Markets. We wanted to write an update to that article but there was so much to say that it turned into a full-fledged article. To give our readers a recap, capital markets is one of the industries in the financial space where industry experts are optimistic about the use of blockchain technology. Also, in this article, we will discuss the benefits and challenges of implementing blockchain technology and will explain how public and private platforms are integrating this technology.
There are several intermediaries involved in a trade, like exchanges, central counterparties (CCPs), central securities depositories (CSDs), brokers, custodians and investment managers. For correct accounting and to complete the business transaction, intermediaries need to update their respective ledgers based on the messages exchanged between them. This essentially means that every time a transaction happens, additional messaging needs to be done. This creates a delay and also additional cost. Sometimes, to enable a particular transaction and the corresponding ledger updates, intermediaries may need to complete a few additional ledger transfers in the form of realignment, securities borrowing or cash management. This introduces additional delays in the transaction lifecycle and is usually referred to as a settlement cycle in capital markets (represented as T+n days, where “T” represents the transaction date and “n” represents the number of days taken for the transaction to be settled).
Solutions from Blockchain Technology
- Financial institutions can build a shared flat ledger using blockchain technology managed by trusted processing nodes. Using digital signatures, financial intermediaries can update the ledger to complete a business transaction. The shared ledger needs to be encrypted to protect the confidentiality of the data. Key processes involved in executing a trade — such as security issuance, trading, clearing, and settlement — can be redesigned and simplified using such a solution.
2. Belgium-based financial services company Euroclear explains the solution as “The record of each security would be held on a flat accounting basis: put simply, with multiple levels of beneficial ownership in a single ledger. Also, there would be no need to operate data normalization, reconcile internal systems, or agree on exposures and obligations. We would have standardized processes and services, shared reference data, standardized processing capabilities (such as reconciliations), near real-time data, and improved understanding of counterparty worthiness. For privileged participants such as regulators, we would have transparent data on holdings, among many other improvements.”
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