This week, two major financial institutions have started utilizing a blockchain-based trading platform aimed at enhancing efficiency in the securities finance sector. The adoption of this innovative technology seeks to eliminate the cumbersome manual trade reconciliations that have become prevalent in the industry.
The platform, known as 1Source, is developed by a company that specializes in stock lending. Discussions are underway for a global broker-dealer to commence trading through this system shortly, and a number of other firms are poised to join as well. Currently, the two participating banks are engaged in executing securities lending transactions utilizing a distributed ledger that ensures both parties maintain synchronized transaction records.
As the securities finance landscape faces substantial costs—estimated at around $100 million annually—related to reconciliation teams and rectifying settlement breaks, this new system offers to alleviate these financial burdens. By aligning both ends of a transaction from the outset, it removes the redundancy of separate record-keeping and the issues that arise from mismatches.
A representative from one of the banks emphasized that this milestone reflects their ongoing commitment to embrace innovations and cutting-edge technologies to reduce risks. The objective of using this platform is to tackle the challenges presented by manual reconciliation while simultaneously delivering enhanced services to clients.
The implementation of this technology is not entirely new, as other financial entities have leveraged similar services for added revenue streams, allowing users to earn money through stock lending in various regions of Europe. These examples spotlight a trend towards increasing access to stock lending opportunities.
Additionally, representatives from the other bank indicated that joining this platform aligns with their broader goal of harnessing technology to improve client solutions. They view this development as a vital step towards more widespread adoption and future improvements in operational processes, aimed at fostering greater efficiency and resilience within the securities finance marketplace.
The blockchain architecture that sustains this platform, built with Digital Asset’s Canton technology, allows for a shared data environment where transaction information can be displayed to all stakeholders without compromising privacy controls. Initially focused on North American equities backed by cash collateral, the platform has plans for future expansion, including the addition of corporate bonds, non-cash collateral, and access to European markets.
An independent evaluation conducted by Vy Solutions in 2022 highlighted the potential for this platform to save the securities finance industry substantial sums yearly through decreased operational costs and minimized settlement issues.
The securities lending sector has historically depended on fragmented back-office systems, which often lead to inconsistencies in trade records. These discrepancies—be it in quantities, rates, or settlement dates—typically only manifest days post-execution, resulting in reconciliation challenges and increased liquidity risks.
This new system addresses these challenges by placing each transaction onto a unified ledger, providing all parties with real-time access to identical information. This design facilitates the processing of lifecycle events, such as recalls and rate changes, within a single system, ensuring that both parties remain updated simultaneously.
The growing network of participants enhances the platform’s overall efficiency and transparency, with each new addition contributing to its effectiveness. As the platform continues to evolve, it currently offers features such as loan initiation, market calculations, and various rate adjustments, with plans for further automation of loan book rereating as market conditions change.
Overall, the move towards adopting this blockchain-based trading platform signifies a significant shift in the securities finance landscape, promising to deliver substantial operational efficiencies and cost savings for the industry as a whole.