Post-Trade Infrastructure Undergoes Overhaul
Major players in fixed income and derivatives are re-architecting post-trade processes using new technology. DTCC, ICE, and Citadel Securities are collaborating on a project called “Zero Blockchain” to modernize market infrastructure. In a related move toward automation, Tradeweb completed the first fully electronic swaption termination, automating a complex corner of the fixed income market.
- The "Zero Blockchain" initiative by DTCC, ICE, and Citadel Securities is built on LayerZero, a protocol aiming for high scalability to overcome limitations that have hindered the adoption of distributed ledger technology (DLT) in large-scale market infrastructures. This new permissionless blockchain, named Zero, claims the ability to support two million transactions per second. - The technology behind Zero's scalability involves moving away from having every full node on an Ethereum Virtual Machine (EVM) independently verify and execute each transaction. It utilizes Jolt, an open-source virtual machine developed by a16zCrypto, and runs on GPUs to enhance performance. - DTCC will specifically explore using Zero's technology to improve the scalability of its Collateral App Chain and the DTC Tokenization Service. This follows DTCC's broader strategy, which includes a roadmap to move all of the approximately 1.4 million securities it holds onto a blockchain to optimize collateral, enable real-time settlement, and secure 24-hour liquidity. - The recent move by Tradeweb to automate swaption terminations addresses a significant inefficiency in the bilateral derivatives market. Unlike centrally cleared swaps, swaptions are not easily compressed, requiring manual termination or novation to be removed from a firm's books before they expire. - The first fully electronic swaption termination was conducted between Citadel and Wells Fargo on Tradeweb's Swap Execution Facility (SEF), with post-trade processing handled by OSTTRA's MarkitWire platform. This innovation is designed to reduce the risk of booking errors and speed up the post-trade confirmation process. - The push for modernization is also driven by regulatory changes, such as the move to T+1 settlement in North America, which has increased pressure on firms to automate post-trade workflows to manage the compressed timelines. - Broader technology trends in post-trade infrastructure include the increasing adoption of AI and machine learning to enhance risk models, automate manual processes like data entry and reconciliation, and gain insights from large volumes of post-trade data. - The overarching goal of these technological shifts is to reduce operational risks and costs, with some estimates suggesting blockchain could cut post-trade processing costs by up to 50% by minimizing the need for reconciliation and trade break analysis. These advancements are also seen as foundational for the tokenization of assets, which is expected to significantly alter market structures.
