Today giant asset manager Vanguard outlined details of its latest blockchain project. It’s exploring blockchain for foreign exchange forwards for the over the counter currency market. It conducted a proof of concept collaborating with BNY Mellon, State Street and Franklin Templeton.
“For more than two years, we’ve been developing blockchain use cases to help transform the capital markets,” said Warren Pennington, principal and head of Vanguard’s Investment Management FinTech Strategies Group. “The current environment emphasizes the need to streamline, automate, and secure critical business processes. When procedures are highly reliant on manual intervention and disconnected operations, it makes the markets vulnerable to disruption from crises and even simple manual mistakes.”
Following the 2008 crisis, there’s been a regulatory push to standardize and get more control with respect to over the counter derivatives. Industry body ISDA worked with the industry on the Common Domain Model (CDM) which, apart from data standards, specifies processes or workflows for contracts such as foreign exchange forwards.
It ensures that all parties that adopt the standard are talking the same language even when not on the same network. This can help to reduce costs significantly. We asked Vanguard whether it has adopted the CDM and a spokesperson responded: “While we are following the ISDA’s progress around the common domain model, it is not currently in scope for the platform.”
Automation of margin calls is something that the CDM addresses and has been a recurring topic of late and one mentioned by Vanguard. It highlighted the ability to “value, move and settle collateral instantaneously” using blockchain. A few months back, JP Morgan went live with another distributed ledger technology (DLT) system to automate collateral transfers for derivatives.
“Our work towards conducting the first FX forward contract on a DLT is one of a number of use cases we are looking at in our efforts to modernize trade lifecycles and improve the client experience,” said Jason Vitale, head of FX at BNY Mellon.
“Our firm’s digital strategies overall are centrally focused on reducing our customers operational challenges through both process automation and by utilizing state of the art technologies that drives efficiency and growth, and we believe this pilot will help us further achieve that goal,” said Dean Sakati, head of Product Innovation and Business Development for State Street Global Markets.
Automation sounds like the primary motive here, particularly as it relates to forwards. However, Vanguard’s head of FX trading, Andy Maack previously spoke to The Trade, where he stated that DLT could be a tool to disintermediate banks in forex trading and enable peer-to-peer matching.
In terms of next steps, a spokesperson told Ledger Insights via email: “We anticipate that over time, this pilot will help drive beneficial change, reduce costs and exposure to errors, increase transparency, and ultimately deliver a more efficient business model that becomes the basis for the next generation of capital markets activity. Over the next twelve months, we will continue to build out capabilities on the platform with our partners.”