OCC to overhaul securities lending infrastructure with DLT system
05 May 2020 Chicago
Image: SergeyBitos/Shutterstock.com
OCC, the world’s largest equity derivatives clearing organisation, has set its sights on becoming the first central counterparty (CCP) to fully leverage distributed ledger technology (DLT) for its securities lending clearing system.
The Chicago-based CCP is set to develop and implement a DLT solution to replace its ageing securities lending infrastructure with a “future-fit CCP securities lending model” as part of a radical overhaul of its entire technology infrastructure known as the Renaissance Initiative.
The system will be developed by Axoni, a New York-based technology firm that specialises in multi-party workflows and infrastructure and built on its flagship distributed ledger protocol, AxCore. It is also slated to be hosted in the cloud.
For Axoni the project comes shortly after it went live with a platform that manages equity swap transactions for several leading sell-side and buy-side firms.
The platform was developed as part of a collaborative effort with 15 major institutions from both sides of the street and it saw its first live trade processed between Citi and Goldman Sachs in February.
Ishan Singh, vice president of solutions at Axoni, says the new OCC project will be among the largest his firm has undertaken and marks its first foray into the securities lending market.
Development is slated to begin imminently with the eventual deployment set to be "rolled out in various phases," OCC says.
The vision of the initial roll-out is to establish a private, permissioned distributed ledger network for cleared securities lending transactions, governed by OCC, with the potential for peer nodes at clearing member firms.
OCC says this will enable participants to have a real time, accurate copy of contract and activity information, thereby reducing the need for manual reconciliation.
Matt Wolfe, OCC vice president, securities finance, says the solution will be “more modular and flexible” to allow OCC to introduce new products and services much more quickly in the future.
Clients will be able to connect to the ledger and have the transactions and contracts automatically synchronised to their system, as opposed to the more costly and error-prone paradigm of independent processing that exists today, he adds.
Wolfe tells SLT: “This innovative technology has a lot of potential to improve the accuracy, automation, and efficiency of client systems, so many CCPs are looking at DLT use cases.
“OCC believes that we will continue our leadership position by implementing the first large scale securities lending system using DLT.”
User feedback
OCC worked with Axoni to develop a proof of concept system early in 2019.
This was demoed to more than two dozen industry participants from retail brokers to large agent lenders and the feedback from those presentations was “consistently positive”.
OCC says that in an anonymised survey after the presentation, 70 percent of the respondents said that they were either “extremely likely” or “most likely” to adopt such a DLT solution.
Crucially, OCC will be introducing the new system in a way that is backwards compatible with legacy systems so that no firms will be forced to change.
“They will be able to migrate to the new technology on their own schedule, which helps to alleviate any reservations that clients may have,” Wolfe explains.
Accommodating growth
OCC’s securities lending programme was created in 1993 to clear and guarantee transactions between its clearing members, with OCC serving as the central counterparty (CCP) to lenders and borrowers.
Since 2012, securities lending clearing volumes have increased by a compound annual growth rate of 16 percent, while open interest has grown by 22 percent.
As of 30 April OCC balances were approximately $72 billion, which is about 13 percent of the total equities on loan across the Americas.
The Chicago-based CCP is set to develop and implement a DLT solution to replace its ageing securities lending infrastructure with a “future-fit CCP securities lending model” as part of a radical overhaul of its entire technology infrastructure known as the Renaissance Initiative.
The system will be developed by Axoni, a New York-based technology firm that specialises in multi-party workflows and infrastructure and built on its flagship distributed ledger protocol, AxCore. It is also slated to be hosted in the cloud.
For Axoni the project comes shortly after it went live with a platform that manages equity swap transactions for several leading sell-side and buy-side firms.
The platform was developed as part of a collaborative effort with 15 major institutions from both sides of the street and it saw its first live trade processed between Citi and Goldman Sachs in February.
Ishan Singh, vice president of solutions at Axoni, says the new OCC project will be among the largest his firm has undertaken and marks its first foray into the securities lending market.
Development is slated to begin imminently with the eventual deployment set to be "rolled out in various phases," OCC says.
The vision of the initial roll-out is to establish a private, permissioned distributed ledger network for cleared securities lending transactions, governed by OCC, with the potential for peer nodes at clearing member firms.
OCC says this will enable participants to have a real time, accurate copy of contract and activity information, thereby reducing the need for manual reconciliation.
Matt Wolfe, OCC vice president, securities finance, says the solution will be “more modular and flexible” to allow OCC to introduce new products and services much more quickly in the future.
Clients will be able to connect to the ledger and have the transactions and contracts automatically synchronised to their system, as opposed to the more costly and error-prone paradigm of independent processing that exists today, he adds.
Wolfe tells SLT: “This innovative technology has a lot of potential to improve the accuracy, automation, and efficiency of client systems, so many CCPs are looking at DLT use cases.
“OCC believes that we will continue our leadership position by implementing the first large scale securities lending system using DLT.”
User feedback
OCC worked with Axoni to develop a proof of concept system early in 2019.
This was demoed to more than two dozen industry participants from retail brokers to large agent lenders and the feedback from those presentations was “consistently positive”.
OCC says that in an anonymised survey after the presentation, 70 percent of the respondents said that they were either “extremely likely” or “most likely” to adopt such a DLT solution.
Crucially, OCC will be introducing the new system in a way that is backwards compatible with legacy systems so that no firms will be forced to change.
“They will be able to migrate to the new technology on their own schedule, which helps to alleviate any reservations that clients may have,” Wolfe explains.
Accommodating growth
OCC’s securities lending programme was created in 1993 to clear and guarantee transactions between its clearing members, with OCC serving as the central counterparty (CCP) to lenders and borrowers.
Since 2012, securities lending clearing volumes have increased by a compound annual growth rate of 16 percent, while open interest has grown by 22 percent.
As of 30 April OCC balances were approximately $72 billion, which is about 13 percent of the total equities on loan across the Americas.
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