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Advances in the Technology of Derivatives Trading and Clearing

Mar 10, 2016
Blockchain Experimentation

Banks and Exchanges Test Ways to Use Blockchain Technology

A year ago, the blockchain was a mysterious technology that somehow powered the equally mysterious Bitcoin. But people in financial services learn quickly when there’s money on the line. Today, most of the world’s big banks and exchanges are either experimenting with the blockchain or investing in companies that work with it.

In January, 11 members of a 42-bank consortium organized by R3 CEV, a New York-based company founded by former ICAP executive David Rutter, conducted an experiment with the company's private distributed ledger network. The participating banks simulated an instantaneous exchange of value on a peer-to-peer basis, without the need for a centralized third party.

Banks involved in the test included such giants as Barclays, BMO Financial Group, Credit Suisse, Commonwealth Bank of Australia, HSBC, Natixis, Royal Bank of Scotland, TD Bank, UBS, UniCredit, and Wells Fargo. The test was conducted using the Ethereum blockchain platform and was hosted on Microsoft's Azure cloud computing service.

"Proving the scale and peer-to-peer operation of blockchain experiments is an important next step in this transformational initiative," commented Alex Batlin, UBS senior innovation manager. "Through connecting 11 bank labs into a simulated-real-world network, we're able to establish the platform we need to test our theories effectively in a safe environment."

Meanwhile, other institutions made blockchain-related transactions for actual cash last month. Australian markets operator ASX announced on Jan. 21 that it had paid AUD $14.9 million (USD $10.6 million) for a 5% share of Digital Asset Holdings, a blockchain company headed by former J.P. Morgan executive Blythe Masters. The investment includes the initial development costs of a private distributed ledger solution to replace ASX’s legacy post-trade clearing and settlement system.

“A retail investor in Australia should be able to sell their shares, go to the nearest automatic teller machine and get their cash out. We can now trade equities in 150 microseconds; then it takes two days to settle. That makes no sense,” said Elmer Funke Kupper, ASX managing director and CEO.

Rather than replace its nearly 20-year-old system with a new version based on the same legacy processes that operate in the market today, the exchange chose to take the opportunity to re-engineer and simplify those processes with blockchain technology, according to a release.

The new distributed ledger system will operate alongside the legacy system for 12 months. In 2017, ASX will decide which it will continue to support. The deal also gives ASX the option to purchase further equity from Digital Asset and appoint a director to the startup’s board.  

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Options Fintech

CBOE Buys Stake in Robo-Advisor

CBOE Holdings announced in January that it has bought more than 50% of Vest Financial, a company founded in 2012 that aims to provide investors with a simple way to use options on individual equities and exchange-traded funds as protection against market downturns. 

Vest's internet-based platform is accessible through financial advisors and is designed to give investors access to the same investment tools and protections already available to institutions and high net worth individuals. The platform enables an investor to choose the desired level of risk for their investments, then structure a protective strategy based on a portfolio of exchange-traded options. The entire process is done online by interacting with Vest's software and the minimum amount required to open an account is just $5,000.

Ed Tilly, CBOE's chief executive officer, called the deal a "groundbreaking opportunity" to expand options and volatility trading. “Our investment in Vest is a major step forward in our ability to democratize the risk management properties of options and volatility trading,” said Tilly.

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Fintech in Asia

Thomson Reuters Supports Accelerator Program in Singapore

Thomson Reuters is partnering with Startupbootcamp to bring technology and market data access to startups that are participating in the firm's accelerator program in Singapore. 

Startupbootcamp is a global network of industry-focused startup accelerators. The company gives entrepreneurs and early-stage companies direct access to an international network of partners, investors and mentors in their sector to help refine their business models and raise capital. 

Each team participating in the Singapore program will receive SGD 24,500 in funding and office space for three months in Singapore as well as guidance on business development from industry experts. The program culminates with a "demo day" where the startups present their business plans and gain exposure to venture capital firms and other potential investors. In return, Startupbootcamp receives 6% equity in the new firms.

Thomson Reuters has agreed to provide technology and market data access to the teams participating in the Singapore program. Thomson Reuters also will be involved in the evaluation process and mentorship for the program.

“Asia is a hot bed of fntech talent," said Sanjeev Chatrath, managing director, Thomson Reuters. "The new partnership with Startupbootcamp reinforces our commitment to creating an open environment and promoting cooperation within the fintech ecosystem in the region. By partnering with Thomson Reuters, startups can make connections that they, with little or no operational history, might otherwise find hard to achieve.”

Other firms that are partnering with the Singapore accelerator program include two Asia-focused venture capital firms, Jungle Ventures and Pix Vine Capital, as well as banks such as Banco Intesa Sanpaolo, CIMB, DBS and RHB.

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Voice over Internet

Green Key Forms Duets with TT and Speakerbus

Green Key Technologies, a Chicago-based firm that provides voice-over-internet services designed for traders, recently announced partnerships with Trading Technologies International, a leading vendor of trading software, and Speakerbus.  

Green Key said TT will integrate its web-based Voice Box technology into its desktop platform. Voice Box makes it possible to connect multiple people by voice on touch-screen tablets and other devices at the touch of a button. Both services are built on HTML5 web application technology provided by OpenFin. 

“TT and Green Key are at the forefront of designing the next generation trader desktop, which is a web-first, rich, integrated experience," said OpenFin CEO Mazy Dar. "We’re delighted they have both chosen OpenFin and look forward to facilitating integration between both platforms and other industry applications.”

In the case of Speakerbus, Green Key announced that the two companies are working together to make it easy for Green Key users to communicate seamlessly with Speakerbus iTurret clients. The combination offers users secure access to multiple voice networks within a financial institution’s infrastructure, maximizing the existing investment in WAN, unified communications and voice recording infrastructure, while reducing the cost and time associated with managing multiple private cloud networks and private wires.

“We’re delighted to partner with Speakerbus to deliver another cost-efficient, highly secure solution to financial services clients. Without investing in infrastructure or dedicated lines, firms using our software or Speakerbus’ iTurrets solution can now communicate with each other and enjoy the benefits that each system offers,” said Eric Detterman, Green Key's chief technology officer.

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Capital Efficiency

TriOptima Adds Inflation Swaps to the Compression Menu

TriOptima, a post-trade infrastructure provider owned by ICAP, announced in January that it had terminated $98.5 billion in inflation swaps for 18 banks. 

As inflation swaps tend to be long-dated and have compounding coupons that generate large final cash payments, their elimination reduces investors’ capital costs and enhances their leverage ratio, TriOptima executives said.

The compression exercise was limited to inflation swaps based on a specific index that tracks consumer prices in Europe. The company plans to extend the service to other types of inflation swaps, including swaps based on French, British and U.S. price indices.

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