Broadridge recently completed a DLT pilot for bilateral repo. Why did you choose this area?
One of the reasons we tackled the repurchasing, or repo, agreement was Broadridge’s position in the fixed-income markets—in the US, Broadridge has 18 of the 23 primary dealers in its system. Our position provided the necessary network for any blockchain of distributed ledger technology (DLT) solution to be adopted.
The point of the technology is to standardise processes in order to accelerate adoption, and this was one of the key parameters of selection for our test case. We are seeking the ability of a blockchain DLT to provide sufficient process efficiencies, but also to take advantage of the networks that Broadridge has, in order to drive adoption on repo.
And we don’t see it just stopping here. We hope for it to be the foundation that stretches into much broader functionalities in order to achieve a broad collateral management solution. This is part of a much longer road map.
Our thought process is to find specific pain points for specific areas of the market that could be significantly improved in the short term. But, by tackling the foundational aspects, the effects can be compounded to help us tackle much larger problems.
What were the successful aspects of the pilot? And what were the main issues it highlighted?
We worked closely with other collaborating banks to reimagine how we want non-cleared bilateral repo transactions to be. To do this, we recreated the entire process from beginning to end.
Firstly, we onboarded the participants’ collateral into our blockchain environment, and once it was uploaded, we created the application for participants to be able to enter trades directly into the DLT so it captures trade terms in their physical form. It will then allow us to perform lifecycle activities such as mark-to-market, repricing, re-rates and other modifications to the repo contract.
Other areas we tested were collateral substitution, cancellation of the repo, rejection of the repo and, finally, the return of the collateral.
All of these activities were conducted seamlessly using DLT, allowing the participant to interact directly. If one person changes the terms, the other party is instantly aware and can approve, reject or modify them without the need of an intermediary, making the process much more efficient.
Over the course of the heavy development, we have been working to the mantra ‘work and adjust’. During the hard testing of the technology, there were some points where you could see instability, and there are things that still need to be worked out and stabilised in the near term for it to be production ready.
Firms like Broadridge will achieve this. By testing all the different platforms, we will make it happen.
In what other areas are you testing DLTs?
Everything we have done and are doing follows longer-term road maps. In the most recent case we piloted and tested the product for over a week and we continue to work on it as part of that roadmap.
In April, we did another operational test around global proxy voting, collaborating with J.P. Morgan, Santander and Northern Trust, shadowing an annual meeting from beginning to end.
It is something we have continued to focus on because we want to broaden participation in the market, but also to deepen the functionality in order to reimagine the global proxy processes.
Even though we announced it in April, it is continuing on its roadmap towards a much larger solution.
We have other test cases we are working on, but we tend not to announce them prior to testing.
What can other institutions do to help progress blockchain technology?
One of the key factors for success for all blockchain solutions is the broadening of participants. Assuming that the benefits are useful, which we proved in our case, we need more people to participate, and this is something we are working hard to achieve.
We do this through broadening the network to work into this bilateral repo pilot and expanding functionality to move towards a more fully-functioning collateral management solution, which is going to be very exciting for a lot of institutions. We are excited to be collaborating towards that goal.
Have you set a timeline for full functionality of the technology?
It’s very difficult to envisage a timeline, but we are already working on it. We have the road map and are currently working through our phases. We are done with phase one and we have already started on phase two. It is very difficult to time those, but we are working through it. Phase two is all about expanding the functionality of the movement of collateral in a blockchain environment. The further we progress with that functionality, the more it will provide benefits to the ecosystem.
Is there still any skepticism from the big institutions surrounding DLT?
It depends on the use of the technology. In the test cases we have focused on, the technology has proved that it can provide operational efficiency and reduce counterparty risk. Obviously, the technology still needs to evolve—it is relatively infant, but it has made some significant progress over the last six months.
The way that the technology and platforms are evolving is strong, but there are things that need to be worked on. In terms of operational efficiencies that we tested, we were proven right, so we are very optimistic and bullish about the effects it will have in various areas of capital markets.
To stress the point for all the test cases, but primarily for bilateral repo, it is all about the roadmap. We are hoping to work towards a full collateral management solution, which would address an area that a lot of institutions see as a big pain point within the industry.
