Banking Capital markets News

Vanguard, State Street use blockchain for forex derivatives margins

foreign exchange fx

Today State Street Digital announced that it was involved in a transaction that uses Symbiont’s Assembly enterprise blockchain to complete margin calculations for a live foreign exchange forward contract. Vanguard has been working with Symbiont to develop a post-trade automation platform for the over the counter (OTC) foreign exchange derivatives market. This transaction marks its transition from pilot to production.

According to the BIS, at the end of June 2021, the OTC market for forex derivatives contracts had a notional value of $102 trillion, of which $55 trillion are outright forwards and forex swaps, the area on which Vanguard’s platform focuses.

By automating the margin assessments, the calculations can be made more regularly. If the movement of collateral used to support the margin requirements also happens automatically together, this can significantly reduce counterparty risks.

“Leveraging cutting-edge distributed ledger technology represents a giant leap forward in foreign exchange market structure by reducing counterparty risk, automating previously manual processes, and mitigating potential disputes through standardized calculation processes,” said Warren Pennington, Head of Vanguard’s FinTech Strategies Group. “The lower risk and increased speed will lead to lower costs and improved outcomes for investors.”

Vanguard first spoke about plans for the platform in 2019, and last year, unveiled a proof of concept that included State Street alongside BNY Mellon and Franklin Templeton. Since then, State Street created its Digital division which focuses on blockchain, digital assets and cryptocurrency.

Over the last few years, the derivatives association ISDA has been working hard on standards to enable interoperability across the industry. The Common Domain Model doesn’t just apply to data but also standardizes workflows.

“Our market still manages risk on an overnight basis and lacks an efficient, real-time common infrastructure for valuing trades, calculating margin calls, and moving assets between counterparties as defined by the legal agreements (ISDA/CSA),” said Symbiont CEO Mark Smith. “That hampers the credit both firms are willing to extend to each other and the resulting dealing price.”

Meanwhile, others are also applying blockchain in the derivatives sector. Baton Systems worked with JP Morgan to enable the automated movement of cash and collateral to address margin calls for various derivatives. And Colombian stock market Bolsa de Valores de Colombia (bvc) is working with Contrato Marco to manage collateral for OTC derivatives margins.

Update: Clarified that the derivatives platform is now in production


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