This is a guest review post. Horacio Barakat from Broadridgewhere he is the Head of Digital Innovation for Capital Markets.
A market meltdown and the explosion of FTX may have dampened investor enthusiasm for crypto in 2022, but industry misfortunes have not slowed efforts to transform capital markets through distributed ledger technology (DLT).
A number of banks, exchanges, technology companies, and industry consortia are developing suitable use cases for DLT in capital markets. Today, DLT solutions operate in corporate bonds, securitized loans, private equity, repo and other markets.
The advancement of these platforms from proof of concept to commercialized products is encouraging more market participants and technology providers to join existing DLT initiatives or start their own projects. For the past three years, I’ve been head of Broadridge’s Distributed Ledger Repo solution (DLR), the company’s largest DLT initiative to date.
DLR has been fully operational for over a year, and several customers have been involved and have processed more than $50 billion in average daily volume. Based on this experience, I offer the following advice to companies planning or currently managing a DLT capital market development project:
Aim for big change
Identify a market area where DLT implementation can benefit broadly rather than incrementally. Find a segment where the unique features of DLT can make a step change in efficiency, liquidity or cost minimization.
Fixed income markets provide an excellent application example of DLT. The technology makes it easy to leverage smart contract technology that can help digitize and collate workflows between counterparties or perform corporate actions such as bond coupon payments and principal repayments. Tokenization can increase the speed and liquidity of securities, shorten settlement times, and reduce costs throughout the security’s lifecycle. When evaluating DLT initiatives, firms should consider addressing the toughest challenges in the industry and their organizations with targeted DLT capabilities such as smart contracts and tokenization.
narrow your focus
DLT could one day change the entire fixed income market. However, trying to manage this level of change right out the door is a recipe for failure.
Deploying brand new technology is a challenge, even with limited use. This becomes even more complex if the distribution requires collaboration between many different market participants. Start with controlled use cases that can deliver real benefits for participants in a business or function that are largely self-contained and offer low barriers to adoption, regardless of market.
Deliver benefits quickly
Find opportunities to get instant benefits to attendees. In capital markets, the usefulness of a DLT solution depends on its ability to develop a significant network effect. Even the most effective demonstrations of DLT can fail if enough participants don’t scale up. For this reason, developers should initially focus on use cases that have the potential to deliver tangible benefits immediately, with low risk, to encourage customers to participate.
This was the strategy we followed when developing DLR at Broadridge. In many ways, the repo is the ideal market for DLT. It is largely independent and has complex, multilateral workflows that DLT is designed to address. Our clients quickly realized that the DLR platform would increase collateral liquidity, reduce costs, reduce risk and shorten the clearing cycle. These benefits helped attract large banks and other major repo market participants early in the process and provided the momentum the platform needed to grow and be successful.
Be realistic
Companies should begin their DLT projects with a realistic understanding of the challenges they face. DLT is becoming a mainstream technology and will profoundly change capital markets, but we are still in the early stages of this process as standards are built around technologies, protocols and rules. Despite these risks – and regardless of any drama in cryptocurrencies – I firmly believe that these early days of DLT represent a once-in-a-generation opportunity for companies that can choose the right application and effectively execute DLT development projects in the capital markets. .
