• Joint Bain & Company and Broadridge research estimates total cost and capital savings to global financial market ecosystems of US$15-30 billion
• While 40 percent of firms still take a wait and see approach, report finds that  they can identify “no regret” Distributed Ledger Technology (DLT) readiness preparations to navigate uncertainty and to gain a competitive edge
• 86 percent of respondents expect DLT’s impact on clearing and settlement to be “transformative”
• Report identifies four distinct archetypes for DLT adoption and certain asset classes and activities that are ripe for DLT. In more integrated markets like Australia, Japan and China, DLT is likely to reinforce a relatively integrated structure for cash securities

Hong Kong – February 9, 2017 – A new report Blockchain in Financial Markets: Gaining an Edge, released today by Bain & Company, in partnership with Broadridge Financial Solutions, reveals that Distributed Ledger Technology (DLT) is gaining significant momentum in the financial services industry. More than 80 percent of financial markets executives interviewed expect the impact of Blockchain to be “transformative” and to be adopted by financial institutions before 2020.

At the same time and paradoxically, more than a third (38 percent) of those surveyed said they are taking a “wait and see” approach to the technology.

“It’s clear that financial organizations are talking about or preparing for DLT, yet despite many reasons for delays in adoption, that these firms cannot ignore the impacts on market structure,” said Thomas Olsen, Bain partner and the firm’s global leader for C&IB and Market Infrastructure. “Firms need to elevate their thinking on DLT beyond their innovation labs. The question requires a top-down strategic lens to complement the bottom-up experimentation” he added.

Benefits to global financial markets

Whatever decision an organizations makes, there is a significant amount at stake. The survey estimates a total cost and capital savings to global financial market ecosystems to be between US$15-30 billion (or around 2bps of total assets). Important long-term benefits are also likely to be driven by improved reference data, analytics and applications to machine learning and AI.

“The adoption of blockchain in the financial industry will drive significant benefits to market participants including operational and cost efficiency, said Vijay Mayadas, Head of Global Strategy and US Fixed Income for Broadridge Financial. “We are already seeing participants such as the Australian Securities Exchange (ASX) taking a leap in investing in this transformative technology by using DLT to upgrade their post-trade system. The trend will continue as market participants see real benefits with DLT, which include KYC utility, real-time settlement and enhanced reference data management.”

The research identified several reasons for delaying investment in transformative tech like DLT. As the technology is still uncertain, financial institutions may need to invest first before seeing any potential return. These benefits are also uncertain. 

Additionally, most firms are under heavy near-term financial pressure and are also dealing with non-discretionary investments related to regulations. Competitive positioning and game theory issues which are related to how DLT could trigger changes in market structure and pricing are also key factors delaying collaboration and progress.

Adopting DLT in Financial Markets

The research also found that the impact and evolution of DLT will vary by market with four distinct models likely to evolve. Each market will carry implications for how and when individual firms should adopt DLT:

• In large, complex, but mostly domestic markets such as Japan and China, DLT is more likely to reinforce a relatively integrated structure for cash securities.
• By contrast, the impact of DLT may have the opposite effect in, large financial hubs, such as the U.S. and major European markets where it could foster an even more unbundled and fragmented market structure, with multiple exchanges and utilities.
• Smaller, domestically focused markets like Australia, Canada and Brazil, where DLT could have the earliest impact in cash securities, are already integrated, centralized and face fewer obstacles than the other models. In these markets, economic logic will likely drive consolidation as DLT comes into force.
• Finally small markets with international connections, including Singapore and Hong Kong are likely to remain integrated for cash securities but will be more subject to global market practices and links in derivatives and OTC.

The research data showed some striking results in how differently financial firms are approaching the question of adopting DLT.

Initiatives to Implement Locally

Some respondents interviewed are considering merging local custodians into a JV utility.  For example, the Central Bank in Singapore and others are investigating KYC and digital identify utilities; DTCC is implementing use of DLT in clearing and settlement of the $11T CDS market; and Broadridge, NASDAQ and others are working on using DLT to make proxy voting and corporate actions more efficient.

DLT impact will also unfold differently across asset classes. Smaller and newer OTC markets show signs of getting traction faster given they are less established and represent lower risk compared to scale cash securities markets. (e.g. CME and Royal Mint bullion initiative and Nasdaq’s private market platform).

However, where integrated market infrastructure exists, there are initiatives to implement DLT in equity markets (e.g., ASX).  DLT initiatives seeking to increase efficiency in specific processes such as proxy voting and KYC are happening across market types. Therefore, at its core, DLT represents an opportunity and a threat as cost structure and market practices change and the expected impact varies across the financial ecosystem.

Ready for the Future?

The study finds that each firm needs to define the right approach given their position in the ecosystem. 

Most firms could be doing more to identify the no-regret DLT readiness preparations they should be taking, clearly mapping out how they prioritize their efforts across specific use cases.  One way or another, firms that want to gain an edge must make significant changes to their processes, policies and IT architecture – much of this preparation does not need to wait for complete certainty on how DLT will be implemented. 

Market participants who will win as DLT is adopted will spend less energy on excuses for inaction and more on developing a strategic and longer-term approach, focused on driving towards a more efficient ecosystem and plotting a course in it consistent with who they are, what they do and where they operate.

Those firms that are less systematic and more short-sighted in their approach are likely to see their businesses disrupted as they become less competitive.

The report finds that the winners will be those firms are already taking a very systematic, top down and bottom-up approach to DLT including analysis of how the ecosystem will evolve, thinking broadly about alternative roles they can take in the evolving ecosystem and prioritizing their roadmaps for DLT experiments and investments.

# # #