Huobi Blockchain Research Center | Application of blockchain in the field of "post-trading"

On October 19, the application of blockchain in the financial field broke another blockbuster news: China Securities Depository and Clearing Co., Ltd. (CSDC, hereinafter referred to as "China Securities Depository") and Russia's National Securities Depository (NSD) signed a memorandum of cooperation, and will cooperate in the application of blockchain in the "post-trading field" in the future. Some people believe that China Securities Depository's attitude towards the application of blockchain technology is extremely important.

In China, the attitude of official institutions directly affects the behavior of market participants. The cooperation between China Securities Depository and Russian National Securities Depository will not only improve the efficiency of the "post-trading" process, but also have an undeniable impact on the market.

Huobi Blockchain Research Center has sorted out the important events of blockchain application in the post-trading field in the past one or two years. We hope that through these events, we can see the application prospects of blockchain in this field.

What is “post-trade”?

After a transaction is completed, post-trade processing (in a broad sense) takes place. The buyer and seller compare transaction details, approve the transaction, change ownership records, and arrange the transfer of securities and cash. Post-trade processing is particularly important in non-standardized markets (such as the over-the-counter market OTC). In a narrow sense, the clearing, settlement, collateral management, etc. of securities transactions all belong to the "post-trade" field.

As an example, the following diagram shows the role of ASX (Australian Stock Exchange) in the equity market, including a simplified description of key systems. The right half of the diagram describes some of the post-trading processes for reference.

Summary of important events:

1. Nasdaq’s attitude

At the Marketforce blockchain conference in London in October, Nasdaq introduced potential use cases for blockchain in collateral management (a “post-trade” area), the process of reducing credit risk in unsecured financial transactions, and urged the industry to consider blockchain solutions to replace existing architectures.

Huobi Blockchain Research Center found that when there are multiple clearing houses, the collateral management process quickly becomes complicated. Each clearing house has multiple members, and each clearing house holds different types of securities on multiple CSDs. The application of blockchain will reduce the error rate and complexity of this process.

2. New progress of the Post-Transaction Distributed Ledger (PTDL) Group

In May 2016, the blockchain-centric Post-Trade Distributed Ledger (PTDL) Group announced new members, bringing the group to 37 financial institutions and market infrastructure companies.

The PTDL Group Alliance was established in 2015 and is composed of clearing and settlement centers, exchanges, and banking financial institutions. The project is dedicated to researching blockchain solutions for the post-trading industry.

Huobi Blockchain Research Center checked the relevant information of PTDL and found that their membership includes global banks, custodians, clearing institutions, exchanges, regulators, government agencies and central banks. More organizations will join in the future. PTDL believes that the potential impact of blockchain and distributed ledger technology on the post-trading industry is huge.

3. RISE Financial Technologies (RISE) releases second-generation blockchain technology for the post-trading industry

In May 2016, RISE Financial Technologies (RISE) released the second generation of blockchain technology for the post-trading industry. RISE Financial Technologies (RISE) is a supplier of distributed ledger technology for post-trading settlement and securities custody. It believes that "distributed ledgers can change the solutions for key parts of the post-trading process - mainly clearing, settlement and custody."

RISE was founded in 2014. Its management team includes senior executives who have worked for large financial institutions such as State Street Bank and Deutsche Bank. In early 2015, it acquired Cryptosphere Systems, one of the first companies to develop distributed systems. In mid-2015, RISE used economic consulting firm Oxera to explore regulatory and economic issues in distributed post-trading environments.

4. New progress of ICAP (ICAP)

In July 2016, it was reported that ICAP (ICAP) had created a blockchain "Rosetta Stone" to improve post-trading processes. ICAP used "Rosetta Stone" to describe its new system for managing post-trading processes for securities. Like the "Rosetta Stone", this is a system that has been written into a separate business process, and any seller can conduct various transactions with any intermediary.

ICAP (ICAP Group) is the world's largest interbank trading broker. In 2006, the group acquired the EBS electronic trading platform, which was jointly held by 13 large banks including Citi, HSBC and UBS, for nearly US$800 million. After the incorporation of EBS, ICAP became the world's second largest financial exchange in terms of revenue, and its position as the largest interbank trading platform has become more solid. Currently, EBS platform's Chinese customers include: China Construction Bank, China Bank of Communications, China CITIC Industrial Bank, and Agricultural Bank of China. ICAP Group is active in the following markets: credit, interest rates, commodities, foreign exchange, stocks in emerging markets and stock derivatives.

5. London Stock Exchange, Societe Generale and other financial institutions jointly set up a working group

Last fall, the London Stock Exchange, Societe Generale and UBS jointly formed a working group to study the post-trading applications of blockchain for securities. The institutions involved in the discussion include the London Stock Exchange, London Clearing House, Societe Generale, CME Group, UBS and Euroclear.

Any type of financial asset, such as bonds or stocks, can be converted into a code and transmitted through the blockchain without the need for a clearing house. This means that the clearing and settlement process of stock transactions may be completed in a few minutes instead of two days.

6. Australian Stock Exchange (ASX)

The Australian Securities Exchange (ASX) plans to decide by mid-2017 whether to replace its existing post-trade clearing system with blockchain.

ASX advisers estimate that the use of blockchain technology in Australia’s equity post-trade market could save end users $4-5 billion per year, including exchanges, regulators, participants, custodians, nominees, data vendors and technology providers.

Summarize:

The application of blockchain in the "post-transaction" field can reduce the error rate and complexity of the post-transaction process, shorten the process time, and save institutional expenses.
The important international financial institutions mentioned in this article have a strong influence on public opinion, and these events will have a positive impact on the blockchain market.
References:

1. Goldman Sachs Blockchain Report: Blockchain from Theory to Practice;

2. Nasdaq Sees Low Hanging Fruit in Blockchain Post-Trade, Coindesk;

3. Post-Trade Distributed Ledger Group Grows to 37 Members, Coindesk;

4. Former State Street Blockchain Lead Launches Post-Trade Startup, Coindesk;

5. ICAP is Building a Blockchain 'Rosetta Stone' to Enhance its Post-Trade Process, Coindesk;

6. Post-Trade Processing, Investopedia.