Wall Street Considers Using Blockchain to Track $2 Trillion Repo Market

Rage Comment : The impact of blockchain technology on the market is usually disruptive, so the acceptance of market participants has a great impact on the development of this technology. DTCC recently decided to cooperate with Digital Asset Holdings to explore blockchain applications, and the test object is the repo market. Because the daily trading volume of this market is small and transactions are settled on the same day, a distributed ledger application pilot in this market is more likely to be accepted by market participants and obtain a favorable project development environment.

Translation: Annie Xu

The short-term lending market may be the first major market to record transactions on the bitcoin ledger.

One recent sign that the financial industry is taking blockchain technology seriously is that an industry group that tracks securities ownership has said it is working on a tool to move records of the $2 trillion market to a shared distributed ledger. The Depository Trust and Clearing Corporation (DTCC), which tracks who owns securities such as stocks and bonds, recently partnered with financial blockchain company Digital Asset Holdings to move repo market data to a digital ledger that is shared by market participants, just like the Bitcoin transaction record ledger.

Murray Pozmanter

Murray Pozmanter, managing director and general manager of DTCC's systemically important financial market utility business, said the repo market efficiently supports financial institutions to accept short-term loans from each other and stipulate a uniform repurchase period. Although the market circulates trillions of dollars every day, its daily trading volume is small compared to the stock market, making the repo market a perfect test case.

“We have over $200 trillion in daily trading revenue, but compared to the millions of transactions in the equity market, the repo market has only a few thousand transactions a day.”

Repo is a typical market that settles on the same day, unlike the traditional stock market which takes three days to settle. Therefore, the move to a shared ledger would be a smaller shift for market participants than switching to a slower settlement market.

At the same time, the shared blockchain allows banks involved in processing repurchase transactions to conduct net settlements with each other, efficiently transferring funds and securities across overlapping trading networks between companies.

“The benefit of intra-day netting is that you can take out new loans on the same day and net them against previous loans that mature on the same day, which ultimately reduces the amount of settlement significantly.”

Darrell Duffie

Same-day netting also reduces the amount of collateral needed to finance the loan, such as securities issued by the U.S. Treasury and other debt, said Darrell Duffie, a professor at Stanford University’s Graduate School of Business who has written about repo trades.

“I think this is a smart move that will result in intra-day settlement and more efficient netting, so it’s a win-win for liquidity in the repo market.”

News reports last year pointed out that the high requirements for securities collateral in repurchase transactions mean that bond prices will be affected and some transactions may even be unable to proceed normally if there are no collateralized securities.

Murray Pozmanter believes that DTCC and Digital Asset Holdings will both launch working prototypes this summer and may expand the system next year.

“We will soon start to attract market participants to participate in our pilot projects. Once we believe that the technology is mature and stable enough for limited production operations, we will consider entering the actual production stage.”

DTCC is also investigating other uses of blockchain technology, such as maintaining a shared database of financial reference data, which is a database of terms, codes, numbers, etc. used to record financial transactions. Creating shared reference data helps reduce the possibility of errors and manual modifications compared to each financial institution maintaining its own database.

"If there's one good thing about this system, it's that it gives everyone a single version of the truth."

Digital Asset Holdings, chaired by former JPMorgan executive Blythe Masters, announced earlier this year that it was working with the Australian Securities Exchange to test the use of blockchain technology for trade settlements in the local market.