The Depository Trust & Clearing Corporation (DTCC) and Digital Asset Holdings have partnered to create and test a distributed ledger solution to manage the settlement of repurchase (repo) agreement transactions.
As the Wall Street Journal reports, DTCC, which facilitates the settlement of trades in the $2.6-trillion repo market, intends to see how the blockchain technology could drive repo trading. Repurchase agreement is a form of loan when the dealer sells the government securities to investors and acquires them the following day.
The clearing and settlement of repo trades is a complex process realized in several steps. The use of the blockchain technology will enable lenders and borrowers to monitor cash and securities transfers in real time.
Parties of the repo agreement will be able to get an access to trade information right after the trade is completed. The participants of repo trades include investment banks, hedge funds, central banks and other financial companies.
“Distributed ledger technology has the potential to revolutionize certain post-trade processes that are inefficient and complex, and repos are a great place to start. There are absolute opportunities to make clearing in this area much more efficient, and we look forward to working with Digital Asset on this exciting project,” said Mike Bodson, President of DTCC. “This initiative reflects our strong commitment to leverage this technology and help lead the industry to further lower risk and increase efficiency across financial markets.
With this project, Digital Asset Holdings and DTCC plan to minimize risk and capital expenditure for the repo market by settling transactions in real-time. According to Autonomous Research, annual transactions between Wall Street companies are worth $120 billion and the blockchain technology could reduce them by $6 billion.
“This collaboration further demonstrates Digital Asset’s commitment to enhancing post-trade processes for financial market infrastructure providers and market participants,” said Blythe Masters, CEO of Digital Asset Holdings. “DTCC has an important role to play in the integration of a distributed ledger ecosystem with the existing financial landscape and this joint effort will accelerate innovation while decreasing cost and risk for our clients.”
The first stage of the project will include the development of a proof-of-concept and its integration into the DTCC system. During the next phases, companies will test the solution to ensure it meets industry requirements.
However, it’s still to be seen whether the blockchain technology will reach wide usage in the repo market, as regulators’ concerns could slow down the process. Besides, banks could not support the idea because of the cumbersome integration process.