Euroclear, a securities post-trade services company, has co-authored a report on the applications of blockchain technology in financial markets. The report, Blockchain in Capital Markets – the Prize and the Journey, was written by global management consulting firm Oliver Wyman, which has offices in 50 cities across the globe.
The report examines how distributed ledgers can modernize some portions of the capital markets such as securities settlement and asset documentation.
“Moreover, derivatives will be created as pre-programmed smart contracts, capturing the obligations of the two counterparties (such as margin agreements or swap conditions).”
Specific details were given on how blockchains can improve and augment every part of the derivatives trading process (Pre-trade, Trade, Post-trade). The Post-trade part of the process could benefit tremendously by requiring small margin deposits and eliminating the need for a central clearing party.
However, the report also pointed out that real-time settlement of trades would have material effects on market-makers and high-frequency trading outfits.
“If trading moves to pre-trade validation of ownership prior to the assets being sold, HFTs will need to wait (for even just a few seconds) for each settlement cycle before they can transact again. This would give rise to a substantial slowdown in their rate of activity,”
The report concludes by giving several recommendations on how the technology’s supporters should approach the regulatory and technical hurdles that are currently hampering widespread adoption.
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