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A gamechanger for capital markets?

Before the 2008 financial crisis, OTC derivates were used for both risk management and speculating on the markets.

After the crisis, which was to a large extent driven by credit risk, several things happened.  The first was that “Systemic Credit Breaks” were added to the financial system in the form of centralized clearing houses to stop another Lehman type default contaminating the financial system.  The second was the cost of margining any secured trade not cleared became much more expensive due to the adoption of ISDA SIMM.

These two ‘solutions’ have solved some problems, but created new issues that cannot be ignored, namely

  1. CCPs are now becoming the new ‘too big to fail’ entities.  If there were a repeat of the 2008 financial crisis it is possible a CCP might default.  This would result in another Government bail out funded through austerity and taxation.
  2. Companies that are hedging their economics are finding it too expensive to do so as the amount of Initial Margin they have to post increases.  This results in them reducing their hedges, introducing volatility in their costs and earnings impacting consumers and shareholders.

The SDC is a solution to both these issues.  It facilitates de-clearing and is a much cheaper alternative to ISDA SIMM Bilateral margining.

 

Why Blockchain?

Blockchain technology has some key characteristics that qualify it as the logical and natural choice when re-thinking financial applications.

  • TRANSPARENCY. The blockchain provides easy access and visibility of key transactional data to all market participants, thus helping with building trust in the market partners. In our specific case of XVA Blockchain this entails accredited LEI members who e.g. gain insights into EMIR reporting field information
  • EFFICIENCY. Information within the blockchain is easily accessible and available in close to real-time for further processing. Thanks to this advantage we estimate an up to 90% increase in operational efficiency vs. traditional competitors for some of our usecases.
  • IMMUTABILITY. Thanks to the decentralized consensus mechanism as applied within the blockchain, it is impossible for participating parties to make after the fact changes to the deal.
    SECURITY. State-of-the-art encryption techniques as applied within XVA-Blockchain ensure the full integrity and security of all submitted data.
  • RELIABILITY. No single point of failure as in central systems thanks to DLT technology which is decentral by design which results in a very high availability of the services as well as protection against data loss.
  • STABILITY. As all contributors to the blockchain jointly approve the release of a new block it is not possible for a single party to individually destabilize the system.

How blockchain technology improves financial service offerings

Apart from improved security, transparency, stability and reliability for all involved parties as outlined above, the application of blockchain technology greatly improves on operational efficiency by increasing speed and decreasing cost of financial services. Thanks to full digitalization and central availability of key data points within the blockchain, turnaround time of service offerings is much quicker than in traditional set-ups. At the same time operational workflow investments decrease considerably, leading to cost savings for the involved parties. We estimate a savings potential of up to 90% for some of our usecases.

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