DTCC Completes Test Of Blockchain-Based Clearing And Settlement System
On February 27, 2017, Depository Trust & Clearing Corporation (DTCC) announced that it and fintech startup Digital Asset Holdings have successfully demonstrated a blockchain-based system for managing the clearing and settlement process for U.S. Treasury and Agency repo transactions. A repo, or repurchase agreement, is a type of transaction where a person (the “borrower”) in need of liquidity can sell an asset to a lender in exchange for cash. The lender will buy the asset, providing liquidity to the borrower, because the borrower has agreed to repurchase the asset in the near future, often the following day. When a borrower buys back their asset, they’re paying interest from the original sale price to the lender. A repo is basically a very short-term loan of cash, secured by collateral.
DTCC is a post-trade services provider for many Wall Street enterprises. As its name implies, it handles the clearing and settlement of various financial transactions. Clearing and settlement are the last steps of a trade after it’s been executed. Clearing is where consensus is reached between the buyer and seller regarding the terms of a transaction, and their willingness to participate in it. Settlement is when the actual goods, like cash and a security, are swapped between parties.
It’s this part of a trade transaction that’s most primed for disruption, due to blockchain technology’s ability to effectively automate the entire clearing and settlement process. The blockchain can handle clearing by showing that both the selling and buying parties have reached consensus. A smart contract would handle settlement by releasing assets to the appropriate parties only once certain conditions are met, like the successful completion of the clearing process.
According to Michael Bodson, president and CEO of DTCC, a blockchain-based system was chosen “because of its real-time information-sharing capabilities, enabling all parties to quickly view repo details after trade execution lowering risks and costs."
Now that DTCC is finished with the testing of the blockchain-based system, it’s entering the second phase of the project. The next steps involve forming a stakeholder group of repo market participants who will provide feedback about the system, as well as determining if the project meets DTCC’s integration requirements for deployment. DTCC is set to decide by June whether or not to deploy the system.
The repo market is a $3 trillion-a-day industry, meaning there’s a high volume of daily transactions. Seeing as how repo transactions are generally short-term, using the efficiencies offered by blockchain technology to speed up clearing and settlement of all those repurchase agreements will be nothing but beneficial for all parties involved.