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Wall Street Considers Blockchain For Tracking Trades On $2 Trillion "Repo" Market

The short-term lending market could be the first major market to see transactions recorded by the ledger made famous by bitcoin.

Wall Street Considers Blockchain For Tracking Trades On $2 Trillion "Repo" Market
[Photo: courtesy of Casascius]

In the latest sign that the financial industry is getting serious about the blockchain, an industry group that tracks securities ownership says it’s working on tools to shift some records for one $2 trillion market to the shared-ledger technology.

The Depository Trust and Clearing Corp., which keeps track of who owns which stocks, bonds, and other securities, is working with financial blockchain company Digital Asset to shift data from the repurchase agreement, or repo, market to a digital ledger shared between participants, similar to the one that powers bitcoin transactions.

The repo market effectively allows financial institutions to receive short-term loans from each other by selling securities and agreeing to repurchase them on a set date. While trillions of dollars pass through the market every day, the number of transactions is small compared to, say, the stock market, making it a more manageable test case, says Murray Pozmanter, managing director and general manager in charge of the DTCC’s systematically important financial market utility business.

"We take in well over $2 trillion a day in [repo] transactions, but it’s thousands of transactions as opposed to millions of transactions, which you see in the equity space," he says.

Repo transactions also already typically settle within the same day, unlike stock trades, which traditionally take three days to settle. Moving the repo market to the shared ledger will be less of a major shift for market participants than switching over another, slower-to-settle market, Pozmanter says.

The shared blockchain will also make it practical for banks involved in processing repo trades to net some of the transactions against each other—effectively only transferring the overall total amounts of cash and securities from webs of overlapping trades between companies.

"The benefits of doing intraday netting is that if you can take all of the new loans that are starting today and net them against all of the old loans that are maturing today, you can dramatically reduce the amount of settlements," says Pozmanter.

Intraday netting can also reduce the amount of securities, like U.S. Treasury and other bonds, needed to serve as outstanding collateral for the loans, says Darrell Duffie, a professor at Stanford’s Graduate School of Business who’s written about the repo trade.

"I think it’s a smart move," he says. "It will allow intraday settlement and better netting efficiencies, so it’s a win-win for liquidity in the repo market."

The high demand for securities to serve as collateral for repos can have an impact on bond prices and even sometimes block certain transactions when the securities just aren’t available, the Wall Street Journal reported last year.

Pozmanter says the DTCC and Digital Asset will likely have a working prototype built by the summer, with an eye toward potentially rolling the system out more widely next year.

"We’ll begin having market participants come in and participate in a pilot with us," he says. "At the point where we think the technology is stable enough, and we’re confident of going into a limited production run, then we’ll probably begin to phase it into actual production."

The DTCC is also investigating using blockchain technology for other purposes, like maintaining a shared database of financial "reference data"—essentially a dictionary of terminology, codes, and numbers used in recording financial transactions. Having a shared set of reference data, as opposed to each financial firm maintaining its own database, could cut down on errors and reduce the need for manual fixes, Pozmanter says.

"When you think about what the benefits are, it comes from having that single version of the truth that everybody is looking at," he says.

Digital Asset, which is headed by former JPMorgan Chase executive Blythe Masters, also announced earlier this year that it’s working with the Australian Securities Exchange to test the use of blockchain technology in settling trades on the Australian markets.

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