The brains behind the blockchain
14 July 2017
Much has been written about blockchain, but securities finance is still without a solution. IBM, through partnerships with likeminded institutions, is aiming to change that, as its vice president of global financial markets, Keith Bear, explains
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How much of your day is blockchain taking up?
My responsibilities concern market development for financial markets globally, specifically in regard to IBM鈥檚 blockchain-related activities. I don鈥檛 work exclusively on blockchain but due to the opportunities in that area and the amount of activity we see, it鈥檚 probably taking up three quarters of my day.
I deal with lot of exchanges and clearinghouses that are investing in distributed ledger technologies, as well as some custodians that are becoming a lot more active in this area. Primarily, my work comes under the umbrella of the Hyperledger project, which is hosted by the Linux Foundation, and has been running for almost two years now. Hyperledger now has more than 120 members from a wide range of financial institutions that are looking to participate in the open source project for blockchain technology.
How could blockchain be applied to markets such as securities finance?
We see interest from custodians for a securities borrowing and lending application for this technology and we have a proof of concept (PoC) with a major global custodian that saw clear advantages in validating and and testing the technology. The PoC focuses on applications for the treasury desk of the agent lender as well as the beneficial owner. This involves putting the loan, the cash element from the treasury, the margin calls and collateral movement through the blockchain. The technology has a role to play but we are only just starting to see real activity in this area.
IBM is working closely with DTCC in the DLT space. How are these projects going?
The Depository Trust & Clearing Corporation (DTCC) is working on two publicly-announced projects: one on treasury repos and the other, which we are a partner in, aims to replace DTCC鈥檚 current Trade Information Warehouse (TIW). The system involves upgrading the TIW for credit default swaps with a blockchain environment. The PoC was completed last year and it鈥檚 now in implementation stage with a view to going live next year. The venture will deliver significant cost-savings for DTCC and participating banks by replacing a large legacy applications.
Blockchain could cause disintermediation across the market. Should financial services be concerned?
IBM conducted a market survey of 200 financial market institutions from the sell and buy side and vendors that addressed this issue of market disruption. Very few respondents flagged disruption as a worry. There鈥檚 a lot of talk about disruption but the evidence of any actual appetite to aggressively disrupt the current system is very unclear鈥攁lthough that may be due to where we are on the maturity curve in term of blockchain adoption.
At the same time, we were surprised by the number of firms that expected to go live with blockchain technology by the end of 2017 or early 2018. Around 14 percent said they would launch the first implementation. Current evidence though, with examples such as DTCC, indicate that this estimate may not be that far off.
From what we鈥檝e seen, some of those investing heavily in blockchain are doing so either as a cost-cutting exercise by increasing efficiency, or as a way to mitigate the potential risk of disruption by being at the leading edge of where these new business models may be and gaining a first-mover advantage.
Some custodians and central securities depositories may see themselves at risk and have an incentive to understand how their role may change as a result of this new technology. However, I suspect it will be more evolution than revolution.
How are regulators reacting to blockchain?
Regulators such as the European Securities and Markets Authority (ESMA) are putting in a lot of effort to create a dialogue with the market on emerging technologies such as blockchain. ESMA has requested and received a lot of industry comment on the subject, including from IBM. Thanks to existing examples of blockchain technology, such as the model created by Northern Trust, which is currently live, regulators have a good example of how the technology could benefit them and assist their aims of greater transparency and security. In the Northern Trust blockchain, for example, the regulator has a node that allows it to have a clear view of the transactions being conducted.
ESMA鈥檚 view at the moment is that it鈥檚 not the technology that needs to be regulated, it鈥檚 market participants use of the technology. As we see more products come to market we will see more regulators play a proactive role alongside the market.
There are already examples of this happening with the Guernsey Financial Services Commission and the Japanese Financial Services Agency, which are dealing with developed blockchain solutions at the moment. These regulators aren鈥檛 necessarily taking a leading role but are actively participating because they see the value of what the technology brings in terms of trust and transparency.
Could blockchain help with reporting challenges as well?
Utilising a blockchain solution would help make areas of the market, such as reporting, much more efficient. It could potentially remove the need for trade reporting all together, which is a mounting concern in the securities lending market with the introduction of unique trade identifiers. In a blockchain solution, it鈥檚 possible to have the regulator on a node in the network, which cuts the cost and complexity of reporting, while also increasing the accuracy and volume of information available to the regulator.
My responsibilities concern market development for financial markets globally, specifically in regard to IBM鈥檚 blockchain-related activities. I don鈥檛 work exclusively on blockchain but due to the opportunities in that area and the amount of activity we see, it鈥檚 probably taking up three quarters of my day.
I deal with lot of exchanges and clearinghouses that are investing in distributed ledger technologies, as well as some custodians that are becoming a lot more active in this area. Primarily, my work comes under the umbrella of the Hyperledger project, which is hosted by the Linux Foundation, and has been running for almost two years now. Hyperledger now has more than 120 members from a wide range of financial institutions that are looking to participate in the open source project for blockchain technology.
How could blockchain be applied to markets such as securities finance?
We see interest from custodians for a securities borrowing and lending application for this technology and we have a proof of concept (PoC) with a major global custodian that saw clear advantages in validating and and testing the technology. The PoC focuses on applications for the treasury desk of the agent lender as well as the beneficial owner. This involves putting the loan, the cash element from the treasury, the margin calls and collateral movement through the blockchain. The technology has a role to play but we are only just starting to see real activity in this area.
IBM is working closely with DTCC in the DLT space. How are these projects going?
The Depository Trust & Clearing Corporation (DTCC) is working on two publicly-announced projects: one on treasury repos and the other, which we are a partner in, aims to replace DTCC鈥檚 current Trade Information Warehouse (TIW). The system involves upgrading the TIW for credit default swaps with a blockchain environment. The PoC was completed last year and it鈥檚 now in implementation stage with a view to going live next year. The venture will deliver significant cost-savings for DTCC and participating banks by replacing a large legacy applications.
Blockchain could cause disintermediation across the market. Should financial services be concerned?
IBM conducted a market survey of 200 financial market institutions from the sell and buy side and vendors that addressed this issue of market disruption. Very few respondents flagged disruption as a worry. There鈥檚 a lot of talk about disruption but the evidence of any actual appetite to aggressively disrupt the current system is very unclear鈥攁lthough that may be due to where we are on the maturity curve in term of blockchain adoption.
At the same time, we were surprised by the number of firms that expected to go live with blockchain technology by the end of 2017 or early 2018. Around 14 percent said they would launch the first implementation. Current evidence though, with examples such as DTCC, indicate that this estimate may not be that far off.
From what we鈥檝e seen, some of those investing heavily in blockchain are doing so either as a cost-cutting exercise by increasing efficiency, or as a way to mitigate the potential risk of disruption by being at the leading edge of where these new business models may be and gaining a first-mover advantage.
Some custodians and central securities depositories may see themselves at risk and have an incentive to understand how their role may change as a result of this new technology. However, I suspect it will be more evolution than revolution.
How are regulators reacting to blockchain?
Regulators such as the European Securities and Markets Authority (ESMA) are putting in a lot of effort to create a dialogue with the market on emerging technologies such as blockchain. ESMA has requested and received a lot of industry comment on the subject, including from IBM. Thanks to existing examples of blockchain technology, such as the model created by Northern Trust, which is currently live, regulators have a good example of how the technology could benefit them and assist their aims of greater transparency and security. In the Northern Trust blockchain, for example, the regulator has a node that allows it to have a clear view of the transactions being conducted.
ESMA鈥檚 view at the moment is that it鈥檚 not the technology that needs to be regulated, it鈥檚 market participants use of the technology. As we see more products come to market we will see more regulators play a proactive role alongside the market.
There are already examples of this happening with the Guernsey Financial Services Commission and the Japanese Financial Services Agency, which are dealing with developed blockchain solutions at the moment. These regulators aren鈥檛 necessarily taking a leading role but are actively participating because they see the value of what the technology brings in terms of trust and transparency.
Could blockchain help with reporting challenges as well?
Utilising a blockchain solution would help make areas of the market, such as reporting, much more efficient. It could potentially remove the need for trade reporting all together, which is a mounting concern in the securities lending market with the introduction of unique trade identifiers. In a blockchain solution, it鈥檚 possible to have the regulator on a node in the network, which cuts the cost and complexity of reporting, while also increasing the accuracy and volume of information available to the regulator.
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