Authors
Philip Middleton, Maya Chilaeva, Adithya Metuku, Hubert Lam and Stephanie Quiet
The blockchain is newsworthy because it is the technology underpinning bitcoin. Whilst the authors do not see bitcoin having a big role in market structure, they believe some of the ideas behind it could become mainstream. Specifically, they see promise for the underlying distributed ledger technology in the post trade setting.
Distributed ledgers could help streamline the process for holding and exchanging assets (such as equities, bonds, loans). At present, this can be seen as inefficient at best. The authors believe that depositories and custodians may be the first parts of the market structure world to incorporate blockchain-like technology. It may also be used to streamline cash transfer, especially across borders.
Blockchain is too slow to power a trading venue. Furthermore, the authors think that it is physically impossible for a distributed solution to reach the performance of even the existing generation of trading platforms; hence price formation will remain centralised and the existing exchanges seem unlikely to be disrupted. Volumes could rise, as improved post trade encourages trading.
Derivatives clearing, like trading, is a naturally centralised business. Clearing members depend on the CCP’s risk models, and would be unwilling to move to decentralised risk management. However, new technologies could facilitate more rapid margining and risk management.
Finance is a regulatory construct. Regulators will, the authors believe, continue to look for centralised companies to regulate, and market participants will want solid counterparties to deal with: so, the existing landscape of exchanges, depositories and custodians should endure. Although new technology should improve returns for both exchanges and their clients, competitive advantage may shift towards those whom effectively implement the technology.