ISLA: Blockchain to end counterparty risk, eventually
21 June 2016 Vienna
Image: Shutterstock
Blockchain has the potential to reduce balance sheet use and bring settlement risk to near zero, according to participants in a blockchain roundtable at the ISLA 25th Annual Securities Finance and Collateral Management Conference in Vienna.
The emerging distributed ledger technology could also reengineer back-office processes and reduce the settlement cycle to T+0.
Concerns were raised in the session, however, that a reduction in settlement risk would be offset by an increase in liquidity risk, as rapid settlement is dependant on sufficient cash being available at all times to complete the trade.
Delegates heard that blockchain may create opportunities for banks to provide credit and margin solutions to users that would otherwise struggle to meet the solutions’ cash requirements.
Counterparty risk could also be mitigated through a hybrid central counterparty (CCP)– blockchain system, but the industry will have to wait at least 18 months before anything tangible will be seen.
Panellists described talks between CCPs and distributed ledger technology providers around creating such a hybrid system as being in very early stages.
However, cash markets were highlighted as a simpler market structure that will probably see a functioning blockchain solution much sooner than the securities finance industry.
The emerging distributed ledger technology could also reengineer back-office processes and reduce the settlement cycle to T+0.
Concerns were raised in the session, however, that a reduction in settlement risk would be offset by an increase in liquidity risk, as rapid settlement is dependant on sufficient cash being available at all times to complete the trade.
Delegates heard that blockchain may create opportunities for banks to provide credit and margin solutions to users that would otherwise struggle to meet the solutions’ cash requirements.
Counterparty risk could also be mitigated through a hybrid central counterparty (CCP)– blockchain system, but the industry will have to wait at least 18 months before anything tangible will be seen.
Panellists described talks between CCPs and distributed ledger technology providers around creating such a hybrid system as being in very early stages.
However, cash markets were highlighted as a simpler market structure that will probably see a functioning blockchain solution much sooner than the securities finance industry.
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