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How Blockchain is transforming the Financial markets

Blockchain technology offers great choices in the brokerage services field, and its influence in the markets is already remarkable, from the establishment of smart contracts to the decrease of the default in the negotiations.

Some of the main Financial Institutions at the international level are focusing on the implantation of blockchain technology as a technologic alternative, benefiting from a reduction in time and costs, while increasing security in the transactions.

How can blockchain help to manage Financial institution’s information?

Banks and other Financial Institutions have increased their inversion in technology and innovation during these last years, pursuing a simplification and reduction in the costs of back-office processes.

Proof of this is the decision of the Australian ASX (Australian Securities Exchange), who has recently announced that it will change its clearing and settlement system for a new one based on blockchain technology. This will allow the reduction of costs for its clients and the development of new services. Furthermore, it will achieve more efficiency through a better maintenance of the records, transactions and better quality data.

The Australian Federal Government supports the ASX commitment with the implantation of this technology, which will strengthen the national Financial system via better efficiency. It also supports the innovative initiatives that will put Australia at the forefront of innovation in Financial markets, being a globally competitive nation.

Another official Institution, the Canadian CSE (Canadian Securities Exchange) has also developed a clearing and settlement platform based on blockchain, which allows the reduction of risks for investors, distributors and clients, ensuring the immediate settlement of exchanges.

The development of this platform represents the meeting point between blockchain and Financial markets, thus revolutionizing the conventional transactions and record keeping.

CSE, Blockchain.
CSE, Blockchain.

In the Market field, the distributed accounting system brings great possibilities to the non-affiliated operators, but this is not the only area of impact. Blockchain benefits for Capital Markets in  commercial life are countless, particularly affecting the post-negotiation.

But blockchain is already being used in other fields of the Financial sector, like the Smart Contracts (Swaps case).

With the creation of Smart Contracts, blockchain application is viable to extrapolate specific data or to carry out specific instructions whenever certain parameters are activated.

The Smart Contract allows the automatic processing of payments, only if some requirements are met within the agreed contract. As a result of Smart Contracts, the costly mistakes of the manual processing of the settlement instructions can be considerably reduced.

As all the parts will have access to the same data, the transparency benefit would eliminate the need of a manual settlement confirmation, thus decreasing the conciliation problems that sometimes arise when transactions are not carried out properly.

Reduction of the violation of the trading limits

The commercial activity within Financial Institutions includes operations to cover market positions and also cover existing positions for the bank as a whole in different instruments.

These operations are carried out with other Financial Institutions and they are complex. The trading limits within an institution are valid for notional amounts and settlement dates. There are size limitations for the position by intermediaries, also for specific instruments that include Financial derivatives, options, fixed income and currency hedges.

Violations of the trading limits may be very expensive for Financial companies. Any suspicious activity being out of compliance could be detected and redressed before it affects negatively to the position, the gains and losses and the general balance of the banks.

JP Morgan and its anticipation strategy

By the end of last year, JP Morgan announced that it was developing a program based on blockchain technology, designed to analyze data in sales transactions, and group data pursuing a preventive and predictive utility (trader behavior analysis).

This operation intends to make the traders decisions easier, proving real time data, integrating investment patterns sequenced in an easy way for the user. This way, the learning gap is reduced and it offers immediate functionality.

This kind of technology application is not new, the stochastic orientation seems to be the Holy Grail of the investment of the Financial Markets. This reality is already being applied, and a lot of investors and intermediaries are benefiting from it.

Other examples in the use of Blockchain

Bitcoin

Satoshi Nakamoto design Bitcoin Blockchain as a distributed ledger to record transactions and the transfer of tokens among interconnected networks.

Payment platform

Companies and stock exchange councils are working with blockchain in order to get a global change in transfers and transactions. This month, for instance, the Financial communications company SWIFT announced the success of the proof of concept (PoC) in the development of the distributed accounting platform, an ambitious proof of concepts developed within emerging technologies.

By developing this platform, the purpose is to maximize the cross-border payment settlements, to reduce costs and operational risks.

Do you want to know more about how blockchain is transforming the Financial Markets?

Contact our team specialized in Capital markets through oscar.sierra@nfq.es.