Those of us with long memories in financial services remember the promise of a late 1990s industry initiative to bring standardization, transparency and efficiency to securities processing: The Global Straight-Through Processing Association. The objective — simple yet ambitious — was to enable a straight line of communication among fund managers, brokers and custodians that eliminates the need for cumbersome manual processing. The result would be to vastly reduce systemic risk in the securities industry.
That ambition was never realized. On the last day of 2002, the GSTPA died. The association's CEO at the time, Jurgen Marziniak, was quoted as saying: “We built a very beautiful machine, a nice car that nobody wants to buy.”
I find myself reflecting on GSTPA meetings and workgroups as I interact with industry colleagues today. It isn't nostalgia. It's because the idea of fully automated trade processing has awoken from its long slumber with the emergence of distributed ledger solutions such as blockchain.
In other words, the dream of the GSTPA is alive.
Ideas that started two decades ago are helping power blockchain initiatives making today's headlines. There is an unmistakable correlation between the GSTPA's central matching engine concept and the current focus on building common and instantaneous shared transaction records.
Much like the GSPTA conversations of the past, current debate is centered on how best to deploy a common framework to automate trading, although blockchain's means of achieving it is different. Some market participants, such as the Depository Trust and Clearing Corp., advocate a central distributed ledger to further standardize industry communications. Other industry participants, such as the R3 consortium, see a market for multiple industry-driven utilities to meet the diverse needs of different asset classes and financial products.
It's important to remember a distributed ledger is not a monolithic entity. The contest between Hyperledger and Ethereum signals the beginning of a growing battle for dominance among rapidly multiplying protocols.
Hyperledger comes from the Linux Foundation, with cooperation from International Business Machines Corp. Meanwhile, Ethereum was proposed by cryptocurrency researcher Vitalik Buterin. Both seek to solve problems around blockchain but have very different approaches.
Some enterprising companies are looking to disrupt the model through single point-to-point solutions. The t-zero, or t0, platform, a subsidiary of online retailer Overstock.com, integrates cryptographically secure distributed ledgers with existing market processes to reduce settlement time and costs, increase transparency, efficiency and auditability. Through t0, Overstock will distribute stock directly to investors, handling the clearing and settling of the transactions the same day. While I applaud the initiative, it's important to note this is only a single stock — a different order of magnitude from trading, clearing and settling more than 3,500 equities listed on public exchanges in the U.S.
A big question is whether blockchain can help realize same-day clearing — or T+0 — on all U.S. equities, municipal bonds and other securities cleared through the DTCC. As we welcome these disrupters to the conversation, we are wise to remember the regulators' mandate of securities industry standardization. This framework — in the U.S. alone, involving the Securities and Exchange Commission, the Federal Reserve and Financial Industry Regulatory Authority — was established to protect the market infrastructure and industry participants. Disrupters must work within this framework or risk being on the wrong side of a regulatory enforcement action.
Would-be disrupters might be missing two considerations. First, there is nothing preventing T+0 settlement in the U.S. fund industry today. Once a fund sends a trade confirmation into an exchange, those same instructions are shared with the fund's counterparties and custodian banks via Omgeo ALERT. If the settlement instructions allow, clearing and settlement can be done that day. Standing settlement instruction databases, which were established by custodians to enable same-day settlement, are a necessary element of the blockchain environment.
The second has to do with the accounting that supports clearing and settlement. Moving cash from one counterparty to another is only a small part of the overall clearing, settlement and accounting supply chain. Disruption will require regulatory hearings, committee meetings, buy-in and large-scale deployment across an industry that today represents $1.4 quadrillion worth of securities. In other words, it will require another GSTPA initiative.
That's why, for the immediate future, blockchain-related breakthroughs will occur in non-DTCC clearable securities such as derivatives and private equity. Seemingly every week, new headlines show the potential of such initiatives. DTCC's announcement that they will deploy distributed ledger technology across credit derivative clearing is an example of putting processes, procedures and lessons learned from GSTPA into action.
Given the unique characteristics of asset classes and differences in markets, it's unlikely that a single system — one big blockchain in the sky, so to speak — will handle those needs. Instead, we'll need to develop multiple systems that interoperate in an efficient, secure way.
Similar insights will lead us to better solutions, leveraging lessons learned from the GSTPA experience — particularly the importance of dialogue in developing industrywide solutions. The end result, we hope, will be a safe, efficient, common platform to reduce systemic risk and provide transparency in securities transactions — fulfilling the promise of the GSTPA.
