hello and to another securities landing saturday i'm roy zimmer hansel i'm your host and today i'll be continuing with my review of the recent securities finance technology symposium in may and another one of the panels today's panel is the first of two on the distributed ledger technology dlt panel it's a fantastic panel in fact there was so much material i've decided to divide it into two different parts and today is the first of those two so if securities lending is your business if you're a lender a borrower an intermediary or just plain interested then this is the place for you so let's get started [Music] hi everyone welcome to another securities ending saturday i'm roy zimmer hansel your host and as i said today i'm going to be talking about another one of the securities finance technology symposium panels this time the distributed ledger technology or dlt panel really excited about this one i think they did a great job and they made it really real and really practical this is part five in my series of reviews on that conference as i said this is what we've been talking about this is actually week 51 or video 51 out of probably 53 or 54 weeks of videos that i've been doing what we're going to be talking about today is the real life challenge challenges and issues that are being experienced and worked through by all of these firms so the occ dtcc jpmorgan hqlax and clifford chance each of those is asked a question by bob curry the moderator and they talk about what they're going through today and each of them i think has been really interesting because they've all given very practical current examples this isn't theoretical it's not high in the sky they were talking about things they are doing today which made it different to other dlt panels that i've seen this is the group bob curry from securities finance times was moderator did an excellent job of it richard glenn from hqlax michelle hillary from dtcc paul peary from jp morgan matt wolf from occ and michael brown from clifford chance so i'll be focusing on what each of those individuals had to say in response to questions from bob so hopefully this video you'll find it helpful and you found other videos helpful if so give us a thumbs up so i know what you like and what you don't like and if you are so inclined and want to see videos for me in future subscribe and if you want to be notified when those videos get posted then ring that bell in the corner there and that will mean that you never miss a video when it's posted okay so the first question that bob asked was for matt wolfe where does dlt fit into your development agenda as it relates to securities finance developments and matt gave us a really good summary of where they're actually going so they started off by going to their members and trying to identify what their greatest pain point was and then focus on delivering a solution on that and i think this whole idea of looking for real-life solutions to real problems people are going through is the way that that any kind of digital technology will actually be applied to this business you have to get to the practical level saying here's a problem and we will make an improvement to that situation and then building on that we'll go to the next phase and the next phase and the next phase i think that kind of approach is eminently sensible what occ found in their discussions unsurprisingly perhaps to anyone in the market is that the daily reconciliations between a lender and a borrower are the biggest issue the biggest things that remain a challenge despite all of the technology despite the increase in automated executions despite all of that the reality is we have reconciliations still at the core of the biggest pain point now it was interesting matt framed it in the sense that they're looking to do two things of course they're trying to solve a problem for their members right that's at the core of it without solving problems you aren't going to be in business but the interesting thing as well which i think was a great takeaway is that what they're also trying to do is gain experience from solving that problem the approach the methodology the technology the identification of the issues the collaborative working the solutions that they would come up with to solve aspects of the reconciliation issue would then teach them how to do the next phase or the next project or solve the next problem more effectively and efficiently so i think that also applies really to what everyone's doing this is all new and it's a new application into this area and so we need to have a continuous learning experience so it was great that he pointed that out and the one of the ways that you make the situation better and you solve some of these problems is really accepting the reality of the world that we're moving from a batch processing environment towards a real-time environment and so everything becomes much more immediate and that's even without the accelerated settlement that we've been talking about and that i did a video on a couple of weeks this is just in today's world the fact that there is compressed time involved and that you want to solve problems more quickly means that we're moving towards real time but that also throws up one of the big issues with the traditional legacy securities settlement systems is that they aren't really they aren't really time specific often one of the challenges with the sftr regulation in europe is determining when a trade was actually executed can you imagine so that's trade execution let alone the actual settlement of that transaction so very much in the background to all of this is trying to get to a world where records reflect the immediate reality of your situation not pending settlements right so a really critical point there and one of the byproducts i think that they uncovered and matt talked about was that you know not only use solving counterparty to counterparty issues but the effective application of dlt can actually solve other issues for members because of course they all have different systems they have custody systems they have settlement systems they have entitlement systems they have cash systems right so there's lots of different systems internally within each firm and so the more more of a golden source record internally that you can use the more effective it is in keeping members own internal systems together so not just counterparty externally but also improving your setup internally and i'm not certain that people necessarily thought about that going into this in the first place so a very useful byproduct bob then moved on to c where he asked michelle hillary where does dlt fit into your development agenda as it relates to securities finance development now the interesting thing about michelle's approach was that it's it's really a big picture on down and all the way through all of their service offerings to their users their participants and members is this whole drive towards operational efficiency because she reminded us that of course securities finance is just one part of what each of those firms does and even so securities themselves securities movements are still only one part of what many of those firms do they have cash businesses they have investment paying there's lots of different businesses that each of these securities firms investment banks and brokers do and so securities finance can't necessarily on its own dictate what's happening and that presents its own kind of challenges which is why you need to take the kind of holistic approach that dtc is talking about here where you're embedding this whole kind of reconciliation concept into all of your processes so that securities finances is handled in that way but also the larger securities movements larger cash movements and then when you get into so do securities versus cash that all of those things are impacted potentially by the kind of efficiencies that more real-time dlt oriented processing can bring to the market and the whole idea was these kind of multiple record types cash securities life cycle events and everything surrounding the securities themselves and the associated benefits and ownership meant that you by having common records again internally as well as externally means that everything is easier to process so it's all about driving this kind of efficiency and although i'm not certain that she actually used the word harmonization but certainly interoperability in the sense of both market participant to market participants so that they have commonality but also internally at firms so that records can mean the same thing in different systems internally within their members and users so really critical point so both both matt and michelle were talking about this kind of a holistic approach saying let's solve problems let's focus on the efficiency side of it let's focus on the immediacy of issues and reconciliation being a key theme really across the board so two of the to the service provider meeting the needs of their members unsurprisingly have common issues irrespective of which entity they use and the solutions that we have here what we want to have is consistent solutions so that occ doesn't go one pathway dtcc doesn't go another pathway and then other market participants and service providers utilities go their own way so again harmonization i think the phrase uh competition and collaboration was used later in the in the session and i think that's really the right way to do it so rather than having all of these firms go away and do their own thing by more engagement with their members they're finding common problems and trying to come up with consistent solutions then bob switched it to the user so jp morgan and paul perry i've seen paul speak a couple of times now always does a great job fascinating guy lots of interesting ideas and views it was no different so bob said cases that jp morgan is or has tackled and i think paul's point was really the theme for this panel what we're talking about here are live dlt applications this isn't theory they have concrete delivery these are things that are at various stages of application and use so this isn't things that they're planning on using one year or five years or 10 years from now these are live to some extent today and jp morgan one of the benefits they have as they set up this group jpmorgan onyx which is really a group that leverages technology so that the business units can come in and develop their own application specific to themselves but again the whole idea by having this kind of centralized area of expertise means that they can learn from other business applications that speeds up the development of applications for other business units and builds on top of it rather than tries to reinvent the wheel each and every time a couple of examples that he gave one was ap jpm coin which is a he was at great pains to say that it's not a stable coin it's just a tokenized representation of cash and the key thing there why do that the reality whether you're talking about securities or cash there is always going to be an element of delay because of the actual settlement of things if i decide that i owe you money and have to make a payment to you i might instruct my bank right this moment but by the time it gets into their processing system and by the time it goes through the payment system whether there's collateral to cover the payments or not but the reality is that there is an element of delay and as someone described it later friction in the settlement process so by having a tokenized representation it falls outside of the constraints of normal settlement systems for cash and securities and you can move those assets instantaneously and the transfer of that ownership then of that token is immediate and so you can move cash without having to necessarily move cash the other example i gave was intraday repo or dlt repo again the ideas is by making the asset movement more immediate you can remove the need for intraday unsecured funding because you can move assets immediately as you need them so that's a really important job for everyone to do in in banking because the reality is to the extent that they don't have collateral moving against positions they have to reserve capital so the idea is if you can speed up the velocity of the movement of the collateral then you can reduce your intraday capital funding costs and that has value to literally every bank in the business and again the example being if you had a tokenized movement of collateral versus tokenized cash you can actually remove yourself from the settlement systems and have immediate transfer that actually reflects on both buyer seller receiver deliver however you want to categorize them and let me give you a practical example if you were moving japanese government bond against us dollars cash well you've got two completely different time zones there that don't really overlap effectively and so one of those assets has to move before the other if you remove yourself from those local settlement systems and you instead have a tokenized representation of a jgb and a tokenized representation of dollars in theory you can move those assets versus each other at any point in time and you're not subject to the local constraints and that's what we mean by settlement friction it also gives rise to intraday exposures and you can imagine that you're in a much better place if you can have immediate not time zone sensitive transactions and then where would they be going from that like the reality is many of these products are at the minimum viable product stage and so now they want to develop those those take them into kind of developments from that level paul gave a couple of examples one being term repo the other being cross currency repo but the idea is again this building process you develop the core issue which solves a problem and then you build on top of that to make it have more utility and then you continue to develop and so you're creating a product range over time and in each case solving a problem giving a payback therefore giving a a use case or a benefit or support to any further developments and the the whole idea that he was talking about which he stressed was on the verge of production was this idea of properly tokenized collateral to increase the velocity of that collateral to move it from a to b to c in real time and cover the things like the intraday unsecured funding needs bob moved to the use cases for hql x so asked richard glenn what are the use cases for hqlax and what has it brought to the table so richard carried on the theme that was introduced by paul that the real driver for them in looking at their members and potential users is the impact on intraday credit and liquidity to reduce cost right that's what their users want that's what hqlax has to deliver so it's again this whole idea of reducing unsecured credits reducing capital costs and improving liquidity by increasing that liquid that velocity of movement and richard gave a great example which he has first hand of experience in from his uh his previous firm the truth is because there is this kind of lack of ability to move securities at will and instead you're constrained to moving cash and securities in the time zone of the clearing of that asset you end up having to leave excess collateral buffers all over the place you know whether that's cash or whether that's securities you you're leaving securities unutilized because you have to leave an excess there in case something comes up and if you at the end of the day of the local market if you have excesses there you can't really move them because it's already too late to move them so it's all kinds of inefficiency baked into a modern settlement system right that actually is the target to improve and while everyone's leaving this excess of collateral richard pointed out that there is a massive growth in demand for collateral things like the uncleared margin rules have been impacting users for several years the next phase is in a few months from now the final phase but there's more and more need for regulated collateral applications plus with the growth and the market the volatility the truth is people have more exposures to cover off any collateral exposures any credit exposures you might have to a counterparty which looked like they were collateralized earlier today but because of market volatility you're no longer as well protected here we are leaving pockets of collateral everywhere underutilized yet at the same time we have more and more need for it and so the real question for a user becomes where do i leave those sets am i just looking at the convenient place to leave is that should i just go with whatever the easiest option is or should i go to the cheapest option should i just keep the assets wherever it's cheapest even if that gives me problems when i want to maybe mobilize or utilize it more effectively or do you try to actually find the place where you can most effectively deploy it but it takes a lot of work and investment and and focus and direction and so that's an opportunity cost where you're not doing something else so it's a huge challenge for people and so one of the points that richard focused on was the whole sort of fact that dlt gives that immediacy of movement potentially and also that there's a specified time when something settles that when an asset is on your ledger that is owned you know you've actually got that asset whereas with settlement systems with clearing systems you know that by the end of the day it will be finalized but during the course of the day there's still possibilities for things to change through throughout so the fact that you can now or in as part of the dlt application be able to move assets know the data can happen immediately no that becomes an asset transfer right away and that's final transfer and that's actually been moved and you now have it and you now have it again free of time zone impairment and you can move it again hopefully again we'll talk about that with the legal issues but the whole idea is you now have an asset it's available and you're not constrained by a local settlement time frame and so one of the points which i don't really hear people talk about that often but this whole idea about real-time visibility into your collateral also gives a rise to the ability to have a lot more data that you can use to manage identify analyze and maybe improve the processing of your collateral position so really getting into the stage of proper optimization optimization look is a challenge and and it's also a journey it's not an end destination point to me having that kind of real-time access and information is a huge upgrade in terms of your ability to optimize your assets bob then moved on to the legal challenges and they are not inconsiderable and the representative there was michael brown from clifford chance and so michael took us through the response to to bob's question what are the major hurdles to putting products into place and michael started off with the fact that dlt as a phrase covers a really broad church of products right so that's everything from smart contracts through representation of assets and so each of those carries its own unique question answers and considerations and requirements as well so you can't just say dlt here's a question and here's the answer because it's much more specific to each of the individual applications of it so he's thrown out a million questions for us here so when he's talking about he and for one of his clients one of the people he's advising is that you have to start with what is the platform and what's it trying to achieve and then that sends you down one path or another so for the sake of this session of course he's talking about asset related representation uh for the tokens so that's what we're talking about here it's about a representation of some kind of a related uh real life asset and that's what the token is and that sends you down a certain pathway the more questions because now if you have the real assets then you have to say okay so where are those real assets who owns them and who are they held for do they own them or is it held for the token holders or some other third party and the holders of both the tokens and the real securities who has the rights what rights do they have what are their entitlements and are the movements of those tokens are they enforceable right and that throws up its own challenges which i'll get to in a minute and when i'm talking about entitlements what i mean are things like any corporate action activity any income that spins off in dividends or interest payments voting imagine you've got the real securities with votes attached to them and then you've got tokens representing those real assets who's got the ownership right to that vote right and that's a really critical question and again this question of interoperability michael was saying that he certainly hopes that these platforms work together again collaborate while still competing because again one of the key friction points is if you have assets stuck in one platform and they need to move to another platform and they need to go back to the real world of moving the physical securities from one platform to another platform or enabling the securities to be used in another platform but via the kind of analog world that we're in today the reality is that is a huge inefficiency for the market and no doubt throws up some risks in and of itself so collaboration amongst platforms is what he's hoping for and then he went into regulatory issues i'm sure he could have done a panel on his own on just this topic because you have multiple jurisdictions you have multiple participants not all of those participants are principals many of them securities lending agents are by definition agents for other principles and so you can imagine that in theory if you were having to go and re-paper every one of those relationships that might be a daunting task even if you thought it brought huge value one of the questions is can the platforms provide the answers and then users of that platform would be covered on that but look don't underestimate the legal documentation challenge of that look and pledge is a good example of that pledge has quite a lot of value to borrowers and that should impact where securities are borrowed from nevertheless what that also means is down the chain through the agents and to the beneficial owners that has involved a lot of re-papering and so it hasn't probably had as much impact as the value it might bring okay a really key point there and then you have just some follow-on questions if you've received tokenized transfer can you then reuse it and then what about pledge within this structure as well not just a series of questions that answer what happens in a transfer of title scenario and the extent to which you're covered but what about pledge on top of the dlt structure how does that actually work so paul made the point that look we can already do this we've proven the point technology works yes we're still building more and more applications but we know that it actually works it's that regulatory uncertainty that remains and look the reality is that securities markets cash markets for the hundreds of years that they've been around the reason that we have so much more understanding of what happens in worst case scenarios is not because there were geniuses 400 years ago and foresaw everything the reality is that markets and legal frameworks and documentation have evolved over time right regulation documentation and legal infrastructure learns from experience and becomes adapted so it's not a surprise to me that there's this much uncertainty that remains within the dlt structure but nevertheless it's a huge hurdle and then richard added in just as an example on top of all of these other questions is the security of the data and knowing that the assets when you need them are they there and are they available for use by by the person that needs to needs to actually realize on that collateral lots of questions i think i think michael's objective is as he said at the end and i'll talk about this next week his real objective is in the future to be able to give more answers rather than just providing a list of questions that need to be answered so just a quick one before i wrap up i haven't shown this slide for a while we've got a lot of new subscribers we do a number of securities finance related courses one on securities lending in fact we have two on securities landing a free one which is a primer so that's that's about an hour just on the basics of securities lending and then of course we have the fully paid for course eight lessons plus an exam lots of different firms are doing this for getting this for their staff and lots of individuals are doing this themselves so if you have any questions let me know on that and so look that's a wrap for this week i'm not going to do a summary because i've split it into two i thought if i ended up talking about the audience questions and then the final wrap up it wouldn't give enough time to all of the individual pieces so i thought i'd split it into that's what i'm covering next week so a series of questions from the audience and then the wrap-up question which was a dlt where do you see it next year and then three years from now i hope you enjoyed that i hope it was good it was a fantastic panel as i said look i learned a lot i hope i hope this sort of revisiting by me on this has helped ingrained it i'd encourage you to actually watch the panel session itself directly i'll put in the show notes where you can register for that and hopefully still see it other than that i will be back next week with the part two of that and we'll wrap it up so that's it for me have a great rest of the weekend have a great week and i will see you next saturday [Music] you
2022-07-06