Distributed Ledger Technology In The Capital Markets Game Changers – Future Trends In Securities Services

cash equities clearing and settlement activities onto Digital Asset’s proprietary ledger by 2021 (1). More recently, large asset managers such as Schroders have started major DLT programmes as they too look to leverage the technology. While it is hard to separate global levels of investment in DLT from cryptocurrency-related spending, a recent study estimated DLT spending in financial services hit USD1 billion in 2017, adding it would increase to USD1.7 billion per year going forward (2).

is moving closer to achieving implementation at scale.

DLT’s ability to establish a ‘single version of truth’ allows it to cut across corporate boundaries and existing market structures. One of the most obvious applications for DLT is as a single asset register for asset managers or brokerdealers. This ‘golden source’ would eliminate internal reconciliations, enhance capital efficiencies and give clients or regulators controlled access to real-time data. Other DLT applications may include the facilitation of operational efficiencies in derivatives clearing, payments, trade finance and fund administration.

Integrating DLT across multiple market participants opens up vast potential benefits in the post-trade arena. For exchange traded assets this scope is illustrated by the ASX’s (Australian Securities Exchange) decision to move its

DLT has the potential to deliver extensive commercial benefits and cost savings across financial services. By streamlining processing and eliminating intermediate steps, DLT should deliver significant savings across the operations, technology and finance operations of buy side and sell side firms alike. Shorter settlement times and more efficient use of collateral, for example, could reduce capital costs, especially on the sell side. The annual savings of this are estimated to be in the billions of dollars (3) . Generating such efficiencies will be very valuable for individual firms in this current macro climate, which is dominated by rising regulatory costs, increasing operational requirements and performance constraints.

Elsewhere, the technology could play a critical risk mitigation role. Through a simplification of capital market processes, DLT can help institutions reduce their settlement risk, counterparty risk and operational risk, thereby making the financial system much safer. Meanwhile, the technology’s encryptions and cryptography are an effective preventative tool against cyber-risk, which is becoming an increasing problem for the industry. In time, DLT could also provide institutions with new revenue streams, especially if the technology can help generate liquidity savings through its ability to tokenise securities.

Set against these positive drivers, the evolution of DLT is also likely to face a number of obstacles over the next few years. Firstly, a lot of institutions simply do not have the correct skills or adequate knowledge to develop, operate and oversee DLT. Even though efforts are presently underway to create common industry standards on DLT, an agreement has yet to emerge. Without any harmonised principles underpinning DLT, interoperability of the technology across multiple business streams and institutions will be very difficult. In many instances, there were unrealistic expectations about what DLT would achieve. As a result, firms invested into costly POCs which were never going to deliver on their stated objectives, mainly because they were trying to fix a “problem” which was never a real issue to begin with. In short, DLT integration is a process that needs to be executed intelligently.

Hong Kong, Japan, Singapore and the UK are studying DLT and allowing trials to take place in what could act as a spur for further private sector investment. For institutions looking to develop DLT programmes, they will need to engage with fin-techs, DLT specialists, service providers and each other through established consortiums such as R3 or Hyperledger. At an industry-wide level, partnerships with academic bodies participating in forums such as the Post-Trade Distributed Ledger Working Group could also be a catalyst for DLT adoption (4).

Within two to three years DLT applications will begin circumventing existing processes and structures, with the possibility of re-arranging the investment value chain. HSBC expects DLT to achieve adoption at scale in capital markets within five years, and to be running alongside and even replacing core market infrastructures within ten. For now, a theoretical scenario of totally decentralised global markets is harder to foresee. In HSBC’s view, every investment firm should take an interest in DLT, even if they do not wish – for now – to take an active role in its actual development. This will enable firms to monitor progress, identify opportunities and avoid being caught out by DLT’s capacity to redistribute economic value.

Stephen Bayly, Chief Information Officer, HSBC

As DLT moves into the mainstream, the technology will find itself under growing regulatory scrutiny. While it is still unclear how supervisors might apply existing regimes (MiFID II, EMIR, GDPR) to the technology, regulators and central banks across Australia, France,