In his latest blog, a well-known UK-based commentator on financial services, quoted a recent study by Deloitte, showing that nine out of ten blockchain trials go nowhere. In fact, only 8% of blockchain projects launched in 2016 are apparently still in existence. At the same time, there is no shortage of perceived potential applications for distributed ledger technology (DLT) in financial services.

Collateral management is one area where ongoing trials are showing some promise, partly as a result of market pressures and partly because of the type of information that needs to be recorded and transferred in the course of a collateral management transaction.

A report in late 2017 in Global Custodian magazine noted that with much high-grade collateral being held at central counterparties (CCPs) and banks accumulating large quantities of high-quality liquid assets (HQLAs) to meet Basel III’s capital rules, there is a growing fear that financial institutions could face difficulties identifying pools of eligible collateral to post for margining purposes at their CCPs. The issue is one of collateral velocity rather than actual shortage.

Collateral management – safe and seamless

Margins can be called on a daily or intra-day basis during periods of market stress. At such times, collateral management processes have to be seamless. This desire for safety and seamless collateral management is one reason why a number of custodians are throwing their weight behind a new segregated account structure established by London-based LCH, enabling derivative users to post collateral directly with the CCP, thereby retaining beneficial title to the assets.

Other collateral-related initiatives have also received publicity: Citi and CME Clearing have teamed up with Baton Systems to implement a blockchain-based platform allowing banks to view their collateral in their ledgers in real time and send cash or securities to clearing houses with one click. In a related area, financial IT provider Broadridge unveiled a proof of concept (PoC) in 2017 in which it piloted the first repo transaction executed on a blockchain platform.

Collateral management + T2S

Easing collateral mobilization has also been a key aim for TARGET2-Securities (T2S): In November 2017, Clearstream went live with a triparty collateral management service enabling banks to mobilize assets across its central securities depositories (CSDs). Taking advantage of the functionality inherent in T2S, the service allows assets to be moved across Clearstream Banking Luxembourg, its international CSDs, and its Frankfurt-based German CSD. Euroclear, meanwhile, has begun rolling out a structure that allows banks to use assets held within T2S to finance non-EU positions.

And what about post-trading?

A number of blockchain-based initiatives beyond Europe encompass collateral management as part of a broad set of post-trade functionalities. Earlier in 2018, the Australian Stock Exchange (ASX) confirmed plans to replace its entire post-trade system, including the clearing and settlement of all equity transactions, with blockchain technology.

In January 2018, a CSD Working Group on DLT signed a Memorandum of Understanding (MoU) on the applied use of DLT in the post-trade sector. The working group includes SIX Securities Services, Strate (South Africa), Nasdaq (CSD in Baltics and worldwide CSD technology provider), DCV (Chile), Caja de Valores (Argentina), ADX (United Arab Emirates), SWIFT NSD (Russia) and SWIFT. It will initially focus on establishing a business framework for the use of digital assets in the post-trade space.

Despite Deloitte’s observation on the past performance of blockchain PoCs, 2018 promises to pull DLT further towards the mainstream in helping to address markets’ collateral concerns.

Roger Storm

Roger Storm, Head Risk Operations & Business Development, SIX x-clear, will be addressing these and related issues in a panel on “Next-level collateral management” at Market360: Post-Trade 2018.