A moveable feast
20 March 2018
Industry participants discuss why blockchain is so appealing
Image: Shutterstock
The past few years have been an exciting place to be in State Street’s securities finance unit where emerging technologies hold the potential to transform a decades old business. While State Street is pursuing multiple applications of these technologies, one of the most promising is the use of blockchain distributed ledger technology (DLT) in securities lending. Over the past few years, State Street has actively been learning, experimenting and deploying new technology, blockchain included, into the securities finance business.
The reasons behind why blockchain is attractive to the securities lending industry are well rehearsed.
Frank D’Agnese, head of product and technology for securities finance at State Street, says: “Securities lending has traditionally been a very manual business. Given the extensive interactivity among market participants, automation at an industry level has been hampered by the challenge in defining standards. As a result, there is an inordinate amount of reconciliation that needs to be carried out on a day-to-day basis both internally and externally, rendering the process very labour-intensive. There is a real opportunity for distributed ledger technology to virtually eliminate that element of securities lending.”
D’Agnese continues: “What we think makes blockchain so powerful is the potential that it has to transform the way that our business works today. The ability to digitise and do away with manual reconciliation and the impact that could have on the overall business model should not be underestimated.”
Recent times have been fascinating both at State Street and in the broader marketplace. Nick Delikaris, head of trading and algorithmic strategies for securities finance at State Street, explains: “If you go back a few years it was all about bitcoin, but it is really the underlying technology (blockchain) driving the excitement now.”
Delikaris adds: “As people dissected the underlying technology of blockchain, it was apparent there could be widespread uses for a broader transformation in finance.”
State Street’s securities finance business partnered with both internal technology groups as well as external financial technology providers to map out a use case in the business. The last two years have seen two proof-of-concepts created, which cemented how this technology could transform the business. Delikaris says: “It is important to note the seamless collaboration between the business and technology. Leveraging State Street’s unique vantage point in the market and marrying the right skill sets of the people working on the project allowed us to build these proofs of concepts in just a few months.”
A key part of the research and development process has been the hiring of significant technical expertise, particularly those with blockchain experience. These new employees have implemented the technology elsewhere, understand the possibilities as well as the constraints, and stay at the forefront of new developments through participation in and contribution to open source efforts.
D’Agnese continues: “That technical expertise combined with State Street’s existing industry expertise is equivalent to adding one plus one and seeing the answer is three.”
Beyond the immediate business case of reconciliation reduction, blockchain offers many future possibilities as well, one of which could include State Street’s making data available to other parties, including regulators. This could clearly reduce the cost of compliance with the many directives currently affecting the organisation and others that are yet to be implemented. While the blockchain-based opportunity for cost savings in the near term and assistance with regulatory compliance longer-term is evident, there are further implications. Every individual securities lending programme has its own set of client-driven parameters relating to commercial terms and conditions, listing such things as approved borrowers and collateral restrictions.
D’Agnese suggests: “Imagine rolling some portion of these parameters out to clients to give them the power to control key aspects of their lending programme directly.”
Delikaris points to the new regulations that the financial world has seen imposed since the global financial crisis struck a decade ago. He says: “Securities lending has become more complex in terms of tracking and transparency. Traders and lenders all have new constraints to think about in order to transact in an optimal way. The industry must move on from historical practices.”
When asked who will benefit from the transformation enabled by a blockchain-based regime, D’Agnese remarked: “Everyone. The benefits of a more efficient product will be shared across the entire financial ecosystem.”
“Fast forward a few years and we could potentially see atomic transactions allowing for near-instantaneous settlement, removing the concept of intra-day risk and the associated capital requirements.”
A popular claim across the international financial services industry is that blockchain will be as transformative as the invention of the steam engine, the building of railways, the internal combustion engine and the internet. D’Agnese concludes: “Blockchain, however, is not a silver bullet on its own, but one piece of technology, albeit a very important one, in a larger jigsaw puzzle.”
The reasons behind why blockchain is attractive to the securities lending industry are well rehearsed.
Frank D’Agnese, head of product and technology for securities finance at State Street, says: “Securities lending has traditionally been a very manual business. Given the extensive interactivity among market participants, automation at an industry level has been hampered by the challenge in defining standards. As a result, there is an inordinate amount of reconciliation that needs to be carried out on a day-to-day basis both internally and externally, rendering the process very labour-intensive. There is a real opportunity for distributed ledger technology to virtually eliminate that element of securities lending.”
D’Agnese continues: “What we think makes blockchain so powerful is the potential that it has to transform the way that our business works today. The ability to digitise and do away with manual reconciliation and the impact that could have on the overall business model should not be underestimated.”
Recent times have been fascinating both at State Street and in the broader marketplace. Nick Delikaris, head of trading and algorithmic strategies for securities finance at State Street, explains: “If you go back a few years it was all about bitcoin, but it is really the underlying technology (blockchain) driving the excitement now.”
Delikaris adds: “As people dissected the underlying technology of blockchain, it was apparent there could be widespread uses for a broader transformation in finance.”
State Street’s securities finance business partnered with both internal technology groups as well as external financial technology providers to map out a use case in the business. The last two years have seen two proof-of-concepts created, which cemented how this technology could transform the business. Delikaris says: “It is important to note the seamless collaboration between the business and technology. Leveraging State Street’s unique vantage point in the market and marrying the right skill sets of the people working on the project allowed us to build these proofs of concepts in just a few months.”
A key part of the research and development process has been the hiring of significant technical expertise, particularly those with blockchain experience. These new employees have implemented the technology elsewhere, understand the possibilities as well as the constraints, and stay at the forefront of new developments through participation in and contribution to open source efforts.
D’Agnese continues: “That technical expertise combined with State Street’s existing industry expertise is equivalent to adding one plus one and seeing the answer is three.”
Beyond the immediate business case of reconciliation reduction, blockchain offers many future possibilities as well, one of which could include State Street’s making data available to other parties, including regulators. This could clearly reduce the cost of compliance with the many directives currently affecting the organisation and others that are yet to be implemented. While the blockchain-based opportunity for cost savings in the near term and assistance with regulatory compliance longer-term is evident, there are further implications. Every individual securities lending programme has its own set of client-driven parameters relating to commercial terms and conditions, listing such things as approved borrowers and collateral restrictions.
D’Agnese suggests: “Imagine rolling some portion of these parameters out to clients to give them the power to control key aspects of their lending programme directly.”
Delikaris points to the new regulations that the financial world has seen imposed since the global financial crisis struck a decade ago. He says: “Securities lending has become more complex in terms of tracking and transparency. Traders and lenders all have new constraints to think about in order to transact in an optimal way. The industry must move on from historical practices.”
When asked who will benefit from the transformation enabled by a blockchain-based regime, D’Agnese remarked: “Everyone. The benefits of a more efficient product will be shared across the entire financial ecosystem.”
“Fast forward a few years and we could potentially see atomic transactions allowing for near-instantaneous settlement, removing the concept of intra-day risk and the associated capital requirements.”
A popular claim across the international financial services industry is that blockchain will be as transformative as the invention of the steam engine, the building of railways, the internal combustion engine and the internet. D’Agnese concludes: “Blockchain, however, is not a silver bullet on its own, but one piece of technology, albeit a very important one, in a larger jigsaw puzzle.”
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