Nasdaq Sees Low Hanging Fruit in Blockchain Post-Trade

Nasdaq broke a lengthy public silence on its blockchain work last week to discuss the technology's applications in capital markets.

Speaking at the Marketforce blockchain conference in London, Fredrik Ekström, president of Nasdaq Clearing, gave a presentation on what the US stock exchange giant sees as a low-hanging-fruit use case for collateral management, or the process by which credit risk is reduced in unsecured financial transactions.

Discussing the challenges faced by the collateral management processes, Ekström told an audience of financial professionals that he believes this area is a natural fit for blockchain as there are multiple parties involved, all of which need to share the same version of truth.

Today, the collateral management process happens through a series of messages among a clearing house, central securities depository (CSD) and a member participating in collateral management. But, Ekström said the process quickly becomes complex when there are multiple clearing houses, each with multiple members and each of which holds different types of securities at multiple CSDs.

Ekström explained:

"The number of transactions and reconciliations increases drastically as we add more clearinghouses and clients."

In this light, Ekström asserts blockchain could provide an easier way for market participants to keep track of collateral with lower overhead.

Elsewhere, Ekström presented his view on other processes in post-trade that would benefit from the use of blockchain technology as well as some projects currently in development at Nasdaq. This included the Linq blockchain platform for private market shares, and its proxy voting project first announced in February.

The event, attended by top financial services industry professionals from London and Europe, discussed the implications of blockchain technology for the industry, with broad consensus emerging that "mainstream" adoption is less than five years away.

Big picture

While it didn't contain any eye-opening revelations, Ekström’s talk did much to bring the big picture for how blockchain could come to be leveraged in post-trade into focus.

For example, Ekström presented his view on how the industry should look at post-trade processes when it comes to blockchain adoption. Instead of seeing the post-trade chain as one black box, he believes that the industry should try to envision a set of processes, which can over time be replaced or made more efficient with blockchain.

Broadly for the post-trade industry, he believes there will be two ledgers needed, a cash ledger and an asset ledger, which will be interoperable so that transactions can interact with both systems.

"The collateral management system on the blockchain will include the member, clearinghouse, bank and CSD as part of the asset ledger and cash ledger," he said.

In a blockchain-based collateral management system, the end-of-day reconciliation of positions held by the member, clearinghouse and CSD could then be done by the blockchain instead of individually by each party.

But as part of his vision of going forward, Ekström said that Nasdaq doesn't want to go it alone (even though it could utilize operational efficiencies by doing so).

Instead, he urged the whole industry to consider solutions that can replace the existing infrastructure with blockchain.

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