The 2022 Russian invasion of Ukraine sparked futures processing surges akin to 2020’s Covid-driven back-office meltdown, say bank sources, when pandemic-induced operational mayhem meant sleepless nights for red-eyed back-office staff. Yet in 2022, no such breakdown occurred.

These earlier processing problems prompted dealers to propose a new utility under the leadership of the Futures Industry Association (FIA). And among the suggestions for improving trade workflows, the use of distributed ledger technology (DLT)—the technology that underlies digital assets.

FIA Tech, a for-profit subsidiary of the trade body, set about creating universal procedures for the trading and clearing lifecycle, including a golden source of data to identify products and brokers, helping minimize the risk of trade breaks.

But when it comes to futures processing, some see DLT as a solution in search of a problem.

“I don’t necessarily know you need new technology to solve that—you just need a better use of existing technology,” says the former head of one futures commission merchant (FCM).

And despite the high volumes experienced after February’s invasion, banks say they coped better than in 2020. Then, most of the processing problems were caused by clients creating a congestion of allocation messages at the end of the trading cycle, says the former FCM head.

Per Haga, global head of prime derivatives services product at Barclays, agrees. In 2022, most of the trades his bank was left with as an executing broker were because the clearing broker wasn’t accepting them and not through client allocation issues. Resolving that pain point is “low-hanging fruit”, he says, and doesn’t require new technology.

This time around, his bank set up daily checkpoints between key operations teams, the front office and the FIA, Haga says. Those checkpoints for the cash close in Europe and the US mean it could “run through any issues and get on top of things”.

“That was actually one of the key lessons from March 2020 in terms of procedures. Subsequently, while the number of breaks was definitely more elevated than the normal roll period, it was far from what we saw in March 2020,” he says.

I don’t necessarily know you need new technology to solve that—you just need a better use of existing technology

Former head of an FCM

The difficulty of deploying blockchain solutions in post-trade is amply illustrated by the experience of the Australian Securities Exchange (ASX). It initially considered DLT to replace its Chess settlement system in 2015. After a series of false starts, the latest in a litany of delays was announced on May 11. ASX ditched an April 2023 go-live, and says a new launch date will be determined after discussion with its technology partner and stakeholders.

Another early proponent of DLT for post-trade was DTCC, which said at the beginning of 2017 it would replace its Trade Information Warehouse (TIW) with a new system using the tech. The original go-live was Q1 2018. Now the system is aimed to launch in Q3 2022.

Meanwhile, FIA Tech will standardise average price allocation methodologies used by buy-side firms in different markets. Chief executive Nick Solinger says the firm continues to work with DLT vendors on evaluating its fitness for purpose. The phase-two roll-out of its platform next year will deploy a more traditional cloud transaction processing stack, which has “more proven scalability and resiliency,”, Solinger says.

PTSD?

Some quarters of the industry contend that while DLT shows significant promise in production use cases for modeling changes of ownership on a bilateral basis—such as moving a payment from account to account—when it comes to post-trade applications such as reconciliations and matching, there’s nothing DLT can do that more traditional technology can’t already achieve.

It is a point largely made by the Post-Trade Task Force (PTTF), an industry body backed by the Bank of England. Its April report, Charting the future of post-trade, suggests standardizing data models and message formats will go a long way to improving post-trade processes.

“Technology isn’t the barrier today for the majority of use cases in the medium term,” says David Hudson, chair of the PTTF, by email. “The group found that these process issues in the report were far more impactful, and none of them related to technology availability.”

Hudson, who is also co-head of digital and platform services at JP Morgan, adds that, in the long term, he can see a world where DLT underpins a different market operating model, where a trade or a security issuance has a completely automated lifecycle. But to get there, he says, “as the current model is very sticky, I think you probably start at the front end, and not the back”.

While the PTTF report states that emerging technology might be more widely used, it concludes solutions already exist for many issues found in non-economic trade data, non-cleared margin and client onboarding. Best practices need to be more widely adopted, data standards made uniform and existing platforms interoperate better. Current technology is simply not used to its full advantage, it finds.

Arjun Jayaram, CEO and founder of Baton Systems, says many blockchains fall down by attempting to retrofit a solution without addressing underlying problems. For him, inconsistent data between parties is at the heart of the post-trade conundrum. “If you don’t build native connectivity to ingest data at its very core, you assume the data is perfect to start with, and you’re obfuscating the problem. That’s doomed to fail.”

“The problem with ASX and TIW is they assume that you can have this perfect world. But you have to be able to deal with that imperfection of missing data, incomplete data and inconsistent data,” Jayaram says. 

He believes the Chess and TIW replacement projects are not places where all pieces of DLT make sense. “You can’t build a system in isolation without understanding existing business processes, existing data problems and existing data models. And that is why they’ve not seen traction.”

ASX would not comment further on its post-trade replacement.

Digitally remastered

Despite its setbacks, ASX has doubled down on its commitment to the new tech, through Synfini, a DLT-as-a-service offering that became production-ready in November 2021. Paul Stonham, Synfini’s general manager, says it offers exactly the same tech stack that Chess is using and ASX is marketing it beyond financial services to other industries including mining and construction.

ASX is partnering with technology firm Digital Asset for the Chess replacement.

Digital Asset’s chief client experience officer Kelly Mathieson would not comment on delays to the ASX project. She does say more generally that DLT as an enabler of mutualized, multi-party workflows is well placed to solve the pain points identified by the PTTF, delivering a lower-cost operating model, with particular benefits around data privacy.

Mathieson agrees on the basic need for a common set of data standards—how to handle transactions and define assets, for example—but argues new technology has a key role to play in getting those standards adopted, “not just having them expressed in standard operating procedures, but in the complementing technology”.

“Until now, you didn’t have a technology that could accomplish that while preserving the ability to control your own data,” she points out. “We would always have had to first make a decision of who got access to all that data. And that usually meant the conclusion of otherwise really good consortium initiatives.”

DTCC would not comment for this article. But Greg Schvey, CEO of Axoni, DTCC’s technology partner, says, “Aligning an industry on a different way of doing things can be tough.”

Axoni is also working with the Options Clearing Corporation on its stock loan clearing system, and says it has just signed another major infrastructure client, similar to DTCC. The tech firm is scaling up, and will employ about 150 people by mid-year.

A key piece of Axoni work that has gathered traction appears to be its DLT for equity swaps. The Veris platform is used by Citi, Goldman Sachs and other counterparties to match trades and confirm terms upfront. Veris uses the common domain model from the International Swaps and Derivatives Association—a standardized model for derivatives trade processing. In November 2021, Axoni announced that BlackRock would join the network, leveraging Axoni’s software through an integration with its own Aladdin operating system.

Pushing back against the notion that DLT is ill-suited to post-trade, Schvey says of Veris: “We do distributed trade matching on our equity swaps network now. It’s happening in real life.” Crucially, he says, production was fast-tracked by working directly with the industry—rather than with existing financial market infrastructures—to build out its own networks where there aren’t currently providers. “That’s given us the ability to drive a lot of this change on our own.”

Others defend delays in post-trade DLT projects for reasons outside the control of technologists.

While it is true that stakeholders from various angles of the post-trade debate “may have lacked a clear understanding of the use case”, it is also the case that regulatory frameworks have taken time to develop to enable implementation, says Goncalo Lima, capital markets ecosystem lead at R3.

He believes “timing is critical”, therefore, for applications involving financial institutions. R3 is one of Deutsche Börse’s technology partners as the exchange prepares to launch a ‘DLT-ready’ post-trade platform called D7. It has had to wait for the recently introduced German digital securities framework allowing electronic securities without conventional stock certificates.

Whether DLT is still waiting for its time to come in post-trade remains debatable. But the technology has never had a better time to prove its worth.