As we move from experimentation to production blockchains, incumbent financial infrastructure players have had to make important choices about where best to implement the technology.
Global information giant IHS Markit has been quietly gauging the potential of distributed ledger technology (DLT) and is positioned to deploy it where it will make the maximum impact.
Much has been written about the standard seven-day settlement period in the $876bn syndicated loan market; a source of frustration which has invited the enthusiastic attentions of putative DLT solutions. Over the years, there have been plans geared towards consolidating or centralising systems, reporting, operational teams, processes, and more. Now the vogue is a more distributed approach using a blockchain.
Fortunately for IHS Markit, in John Olesky, a managing director for loan platforms, the firm found a rare thing: first class domain expertise combined with a deep understanding of technology (Olesky holds a masters in computer engineering).
Olesky explained how, in a sense, his team "parked" settlement for the time being (or the time accepted), and carried on with a detailed analysis of where this technology will yield the best possible gains.
He said: "To begin with, lots of people looking at blockchain were talking about settlement. You write all the transactions to the ledgers, banks and buy-side firms would have nodes, they'd receive those transactions. Now what?"
"Well, they already have integration; we have four different integration mechanisms and people already get their trades promptly after they are published. So what are people gaining on the settlement front? Probably not a lot."
"You could talk about identity; you could talk about embedding terms. These are things you could do differently, but it's not a case of introducing blockchain and all of a sudden T-plus times are going to two days.
"That's not realistic, especially since blockchain is still dependent on having a partner application outside the blockchain, or at least some application that is analogous to what exists today."
Olesky could see DLT's potential to move data around faster, translating into more automation while empowering regionally distributed operations to perform all tasks within the trade lifecycle. He also acknowledged there would be evolutionary gains between 5% and 10% from improved reconciliation – but he wanted to find a big technology jump.
"We said reconciliation would be interesting, because currently we do have banks transmitting positions every night. We already have platforms that provide real-time agency data and automated settlement. So let's also park reconciliation for now."
"Where we arrived at was cash. Today there is essentially nothing for cash. Every single transaction is a wire."
"So all these wires happen in the traditional mechanism; banking has not exactly evolved in that area for a long time. Sure, the Fed is open a little bit longer hours than it used to be, but a wire is still a wire."
It should be said, about five years ago, Olesky's team did a project with DTCC called "Cash on Transfer", which automatically routed the movement of cash to the agent executing the transfer. Only a few of the large dealers joined as counterparties and ultimately the project suffered from lack of adoption, despite well over 1000 funds joining.
In essence this was a very sound idea and it's why Olesky is designing a DLT around cash movement. And when he talks about cash, the goal is three categories of cash: trade settlements, asset servicing, and borrowings. "We are going to start with settlement but of course we also have the infrastructure for servicing and we think we can provide a solution for that too."
He pointed to certain interbank initiatives around the globe where firms can deposit cash for a digital currency equivalent; the digital currency is used for faster exchanges between banks, and is then cash convertible.
"We see cash as a stepping stone to something larger. Ultimately, if we are communicating all cash transactions to folks who have nodes on the network, which of course we are going to provide, reconciliation should be gone. Thus, our expectation is that reconciling cash should soon be a thing of past."
IHS Markit is open to collaborating with DLT providers, but the firm is also able to build out blockchain technology by itself. Regarding this, Olesky espoused a vibrant open-source community, and in particular, JP Morgan's recently released Quorum codebase.
"As far as I'm concerned, any firm that doesn't open source their software is doing a mis-service this early in this technology. So we really commend JP Morgan for Quorum, because we had issues with Ethereum proper, and some of those issues were addressed by JP Morgan's code. That doesn't mean there are not still some challenges; it's new technology."
Olesky said he liked Quorum for a few reasons. "Quorum can privatise transaction blocks and restrict their delivery without breaking the blockchain; this ensures your data is only routed to its intended recipient – and no one else. Quorum also allows us to support upgradable contracts, and in this space, I believe JP Morgan's technology is superior."
"We have quite a close and long standing relationship with JP Morgan. We told them we chose to use Quorum and we have had a couple of calls with their engineers to talk about the stack. If you're an engineer, there's nothing more exciting than someone using what you wrote."