Blockchain: Guiding the Success of Capital Markets

Capital Markets CIO Outlook | Wednesday, July 31, 2019

Capital issuance through a digital ledger provides not only higher liquidity, but also greater efficiency.

FREMONT, CA: Due to market forces, technology-led market disruption, and transformed fundamental company economics, the capital markets sector is undergoing profound changes in operational dynamics. With the introduction of blockchain, capital markets companies are already facing the next level transition in their sights; the technology well-addresses many of the traditional problems. Several prospective blockchain use cases are detailed below.

Real-Time Trade Settlements

In a blockchain scheme, the trade details are passed on to a smart contract held on a permitted network once a trade is performed on an exchange. The smart contract synchronizes with the instruments' ledger positions retained on blockchain and delivers a real-time check on traded instruments' accessibility. Since the rules written on smart contracts and the position ledger on the blockchain can not be altered, this ensures that the trading entities have confidence and transparency, thereby settling the trade on a real-time basis.

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Tri-Party Collateral Management

Financial institutions engage officers from tri-parties to handle their exposure to collateral and counterparties. The present scheme only promotes a perspective of collateral positions, resulting in greater collateral deposits. This results in the suboptimal use of collateral and higher financing expenses. The allocation logic is coded in a smart contract in a blockchain-based collateral management solution. The assigned collateral positions are retained on a real-time basis on a distributed ledger to be viewed by parties and regulators.

Technology Adoption Approach

Because of the complexity of the sector, adopting and enforcing use-cases on capital markets will be a step-by-step approach rather than a big bang. Institutions should define the use case and qualified based on the feasibility of implementation and cost-benefit analysis. Blockchain-based apps are anticipated to become mainstream in the coming years, and organizations with mature capacities that leverage in-house and partner resources are supposed to create a competitive advantage over others who choose to look the other way round.

Blockchain can reshape the capital markets sector dramatically, with a significant effect on business models, risk cuts, and capital savings.

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