The Depository Trust & Clearing Corporation (DTCC), a company that oversees the clearing and settlement of $1.6 quadrillion in US securities annually, has announced it will test a distributed ledger solution for managing repurchase (repo) agreements.
The test, a partnership with industry startup Digital Asset Holdings, finds the DTCC embarking on its first trial of blockchain technology, a move that follows its January participation in the firm’s $60m funding round and coincides with a New York-based event focused on distributed ledgers and their applications.
In interview, DTCC managing director of IT architecture Rob Palatnick explained that the effort is designed to both “validate the technology” and ensure it can integrate with existing company processes. Palatnick estimated the trial, which the company said will start immediately, would take an unknown number of months to complete.
Palatnick told CoinDesk:
“The first phase of this is we’re going to work with Digital Asset on that internal proof-of-concept making sure the technology can appear on multiple nodes, interact or integrate with our internal processing systems and work alongside it.”
The DTCC, Palatnick said, would not be using distributed ledgers to move digital assets or digital currencies representing repo trades.
Rather it will focus on helping those involved in such processes share information on certain types of repurchase agreements traded via the Fixed Income Clearing Corporation (FICC), one of its three main subsidiary operations.
“This is not there’s going to be a Digital Asset chain or ledger and you won’t have to pay a toll to get on the ledger. This will be a DTCC repo ledger, it will be a permissioned ledger,” Palatnick explained.
Palatnick said DTCC will, in parallel, seek to engage with a variety of participants in the repo market who would be willing to work on “next steps” that could take the trial forward. In turn, Digital Asset, he said, will conduct its work as a technology provider.
The trial is notable as it finds the DTCC seeking to aggressively move to experiment with a new technology industry observers have described as a threat to some of its core services. For example, startup Domus Tower has announced plans to attack parts of its market.
The DTCC provides a wide range of clearing and settlement services, charging fees that total upwards of $1.4bn a year for work, according to the firm’s annual reports.
‘Ideal’ test
As with other financial firms, the DTCC’s trial will focus primarily on using distributed ledger tech to bring multiple parties into a digital environment where they can share information on transactions, without the need to transact in digital assets or digital currencies.
For instance, firms like Symbiont have boasted technology that can recreate these agreements using smart contracts on the blockchain. However, Palatnick said that’s not what the DTCC has in mind for its trial, at least at this stage.
“This is information sharing,” Palatnick said. “The trade occurs, the trade is matched. They agree to the trade on existing systems, it’s put on the ledger, it’s ready to be immutable.”
Palatnick said the repo market use case was a great first candidate for the technology given that trades involve “many parties and complexities” that need to coordinate and be coordinated for the timely delivery of funds.
The Securities Industry and Financial Markets Association (SIFMA) estimates $2.3tn in repo agreements are traded daily in the US financial system, with the financial agreements often providing day-to-day business financing it deems vital to the market.
The DTCC’s trial will focus specifically on US Treasury, agency, and agency mortgage-backed repo transactions.
According to SIFMA estimates, US Treasury Securities are present in 34.7% of repo agreements, while agency mortgage-backed securities and agency securities account for 44.8% and 5.9% of repo agreements, respectively.
Systemic improvements
The DTCC indicated that the test will more specifically seek to bring the company into the “start leg” process of same-day trades.
Today, this occurs outside of the DTCC, Palatnick said, due to the fact that any issues with the payment process could lead to overdraft fees for those involved.
“Over FedWire, securities and cash are moving, so it better be right,” Palatnick explained.
The distributed ledger environment will be immutable also, Palatnick said, but once confirmed allow the buy- and sell-side firms that act on this information to more immediately provide capital with more efficiency and security while keeping costs low.
“With many different parties all requiring access to the same information, it’s either everyone shares information or they need to coordinate using different technologies,” he said.
Participants in the repo market include central banks, corporate and retail banks, insurance companies, industrial companies and pension and hedge funds, among others.
Next steps
Apart from its work with Digital Asset, Palatnick said that DTCC is in talks with other firms specialized in different asset classes.
For example, he said the DTCC has been seeking to improve the start of its repo process for some time, but that Digital Asset proved the right partner due to its focus on this use case.
As such, he said the move should not be taken as a sign DTCC believes Digital Asset’s technology is preferred over alternatives, or that it will be the sole blockchain solution for the market.
“I think we’ve made the point that we expect many different ledgers and partnerships that help solve the challenges of the financial industry,” Palatnick said.
As for the expected outcome of the trial, Palatnick said there has been a specific criteria for success set down, though he did not rule out the possibility the trial could potentially fail to deliver expected results.
Palatnick concluded:
“If it’s going to fail, it’ll fail fast.”
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