Captain/Trader Kirk is on the bridge making multiple trades in multiple asset classes with his Klingon counterparty. Spock is in the middle office, reviewing trades, and determining that they’re entirely logical, Captain. Meanwhile, with both normal and extended settlement, initial and variation margins flow in and out of the bank as if the cash was on the Transporter that search parties used to go down and return to planets in Star Trek.
The front office is screaming down to the Settlement Office, “Operations, we need more capital!” Scotty in settlements replies, “We just cannot do it front office. I’m giving it all we’ve got. We are at max optimization and need to wait for the next batch cycle.”
Blockchain Simplifies and Centralizes Trade Flows
In the last series of articles published by members of Perficient’s Digital Assets Team, we wrote about the use of blockchain-based supply chains to assist supply chain transaction partners to share data through permission-based Blockchain solutions. Adding blockchain to the supply chain improved visibility, allowed automatic purchases through smart contracts, and kept a permanent record of what had been ordered as well as status reporting of all items in the supply chain.
In this blog, we wanted to share a practical solution that blockchain technology can offer financial services institutions – the ability to provide instant settlement and optimize collateral on demand.
Any operations team that has dealt with a stock loan trading desk can contest the inherent friction between providing more available securities to the desk and reliance on settlement cycles and market constraints. In today’s world, the operations team can only provide batch cycle processing to the front office of available securities due to the market reliance on DTCC (Depositary Trust and Clearing Corporation) which takes securities on a Continuous Net Settlement (CNS) basis but provides securities on a T+1 or T+2 basis at the earliest.
Imagine additional constraints on Scotty, such as failed trades, extended settlement transactions, DK’d trades, and multiple corporate actions such as tenders, tender options, as well as splits/reverse splits and it’s enough to make Scotty ask to be beamed up.
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Blockchain technology can be a solution to the batch processing issue that plagues trading desks having to wait on settlement confirmation; before having capital/securities available for trading. A Perficient vendor, Paxos, is in the process of applying for a formal clearing agency license to provide instant settlement via the blockchain. Paxos is using its instant settlement platform pilot program they have with Credit Suisse and Instinet (part of Nomura) as the Proof of Concept for the application. In the primary issuance of investment grade bonds, Directbooks has a leading primary markets communications platform for structured deal data, documentation, and information exchange providing industry-changing automation and standardization.
Settlements, Knowledge, and Insight
Instant delivery vs payment settlement with finality, is very close to becoming a solution blockchain can provide. Current market issues related to settlements and risks with margin were highlighted in January 2021 with the short squeeze of Gamestop stock. Instant settlement would have decreased those risks significantly, and regulatory bodies have already determined the need for shorter settlement cycles as a risk mitigation solution.
Perficient is positioned with regulatory knowledge and experts to immediately help firms prioritize the opportunities that will provide the most capital-efficient solutions. Instant settlement via the blockchain is one of those opportunities that would change many capital-reliant processes overnight.
Perficient has numerous ways to help financial asset firms get started with redesigning their back-office flow of transactions without any changes to front-office/trading behaviors. If you would like to discuss ways we can partner with you on a trade flow process map or help you execute a current technology platform assessment, reach out to us here.
Live Long and Prosper.
Carl Aridas has been a member of the Perficient Digital Assets Team since 2021. Supporting mostly large financial services firms, he is certified in the Scaled Agile Framework (SAFe), is a Scrum Master, and is a Six Sigma Green Belt project manager.
Lin Eshleman has been a member of Perficient’s Supply Chain team since 2021. Supporting large, cross-industry Supply Chain firms, he has a PMP certification and is a Six Sigma Green Belt project manager.
Ryan Scruby has been a member of the Perficient Digital Assets Team since 2021. He is a Project Manager with 12+ years of experience in the financial services industry.