Blockchain difficulty in breathing
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London - With much of the regulation written over the last three years slated for implementation, a huge change is being imposed on the industry.
One of the most highly anticipated projects is Target2-Securities, set for a go live date in late June. It is Europe's post-trade harmonisation flagship and continues to move forward in earnest. But not all defects are expected to be corrected by the launch date, he added, and pushing it forward to after the summer is under consideration. For now, European post-trade infrastructure is still viewed as being complicated and expensive, especially when compared to the US, said Alan Cameron, head of relationship management, International Banks and Brokers, at BNP Paribas Securities Services.
There are simply too many entities providing the infrastructure, he added. This will come with T2S. Simplifying processes, said Cameron, is essential to keep fees down in a capital constrained world. In securities services and investment banking, competition is pushing fees down while the ever-increasing cost of technology and regulation has led to an entrenched view that scale is essential.
As a result, the industry is facing a relentless battle for market share and loss of pricing power and fees. Photo L to R: Cameron said there are two elements required for a low cost infrastructure in Europe: There are eight in equities alone, three of them interoperate with each CCP. Interoperability among the eight CCPs would require 28 bilateral contracts and 56 margin transfers, plus all the settlements that need to take place among them, she explained.
Is by actually going through a period of investment where we would expand interoperability and then let the marketplace lead to consolidation," she said. In terms of lowering risk, what's needed is infrastructures that allow at least efficient use of capital and liquidity, BNP Paribas' Cameron said. Collateral for example, is usually only needed for seconds, but to have it in the right place at the right time takes days. Up to now, technology spend has generally been budgeted towards the front office far more than in the post trade infrastructure space, said Keith Saxton, chairman of the Financial Services Programme at techUK.
Another development is blockchain technology that underpins cryptocurrency Bitcoin. The question was raised: At the current pace of 10 transactions a second, it's not about to replace systems in a hurry, said Saxton. However, there are considerable resources going into identifying how blockchain technology could be used. There are many reviews and papers being written by central banks, by regulators, by industry bodies, by the technology industry in terms of potential application of blockchain," he said.
Notably, Nasdaq recently announced a project to incorporate blockchain technology across its enterprise. But even considering it for the securities settlement world still has hurdles to overcome. EuroCCPs Chan pointed out that though an audit trail is created, in the case of collateral management legal issues around rehypothecation and the velocity of collateral would need to get solved. Paul Symons, head of public affairs at Euroclear, added that regulatory intervention is inevitable: Nasdaq to deliver new cash and derivatives clearing, central securities depository CSD and post-trade risk management technologies