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DTCC Open to Business Model Changes in Face of Blockchain Disruption

(@DelRayMan) | Published on March 21, 2016 at 18:13 BST
Feature

DTCC

The company that last year processed $1.6 quadrillion in securities has a lot to lose if it is cut out of the financial food chain.

As a result, the Depository Trade & Clearing Corporation (DTCC) has been working diligently for the past several months to position itself at the center of a wide-range of experiments other companies are conducting with blockchain technology.

Instead of fighting against the distributed ledger technology popularized by bitcoin, the DTCC has embraced the new tool and is doing what it can to help define the future architecture of the industry, even if that means changing the company business model.

Robert Palatnick, chief technology architect at DTCC, told CoinDesk:

"Part of our responsibility of helping the industry to innovate is [looking at] how to bring distributed ledgers into consideration for solving some industry problems. If it means we modify our business model to accommodate that, then that's the way the industry uses us."

The DTCC charges account fees to its users in addition to recurring monthly fees and processing fees. With total securities processed in excess of $1qn per year, its fees that average in the fractions of a cent added up to $1.4bn in its most recent annual report.

But the blockchain’s ability — in theory — to let the corporation’s customers conduct post-trade solutions on their own could force a change.

Blockchain education

To educate itself on the potential disruption, the DTCC joined the non-profit Linux Foundation’s Hyperledger Project in December 2015, and its systems director Pardha Vishnumolakala is now on the project's technical steering committee.

Though still in early stages, the Hyperledger Project aims to offer open-source financial solutions using blockchain tech.

But that was just the beginning of the company's push, Palatnick said.

A month later, DTCC joined the largest investment to date in a non-bitcoin blockchain company and published a white paper in which it wrote that "uncoordinated" research into blockchain applications puts the industry "at risk of repeating the past and creating countless new siloed solutions based on different standards."

Palatnick sees the DTCC’s role as a coordinator of cooperation to help ensure those silos don't exist in what may be an entirely new financial paradigm. He says he takes a phone call at least every other day from different vendors conducting experiments using various blockchains building pilot tests of technology to streamline mortgage loans, syndicated loans and equity settlements, among others.

"Some of the organizations are contacting us because they feel we can help them in a variety of different ways," Palatnick said, adding:

"Whether that’s supporting their use-cases, or bringing the appropriate industry risk perspective of how do you lower the right level of risk to implement a particular use-case."

The experiments

Palatnick wouldn’t mention the specific banks and other institutions with which DTCC is in communication, but he did say experiments are being conducted to integrate blockchain tech into big data infrastructures, an effort which could make identifying past transactions as easy as doing a search on Google.

Frequently the experiments are in what the DTCC calls "white areas" where settlement times average about three days but can take months to close. Last week, during a roundtable attended by 500 of DTCC's clients, the company discussed its goal to cut the settlement time to two days by 5th September, 2017.

According to Palatnick, the DTCC — a private company owned by some of the banks that use it — isn't pushing for a single blockchain which it can manage, but a "fabric" of different ledgers — each decentralized in its own way and plugged into his company's layer of post-trade services.

Indeed, the potentially disruptive impact of the blockchain on the global securities industry has led to some interesting, even surprising, collaborations.

Just three months ago New York City-based Digital Asset Holdings announced that DTCC and its British competitor, ICAP, had each participated in what was then a $50m Series A investment in the company that was later increased to $60m.

As part of that investment Michael Bodson, president and CEO of DTCC joined Digital Asset's board of directors.

Though the actual experiments with which DTCC is assisting remain a secret, we got hint about the kinds of work it might be conducting last week when fellow Digital Asset investor, ICAP, announced it had completed an internal blockchain test aimed at post-trade processes.

Resistance and survival

In spite of all the research into building blockchain tech into the old way of clearing and settling trades, one co-founder whose company’s business model is also impacted by decentralized ledgers thinks DTCC's effort might be for nothing.

"They have to do something," said Jim Mullen, chief technology officer of Firm58, which manages exchange fees for the New York Stock Exchange and other US equities and options exchanges. "They have to look at the tech. But in the back of their mind they need to remember the spirit of the blockchain is to make it so they’re not necessary.”

Mullen, whose company helps its customers stay compliant by curating and analyzing their data, says there may yet be a way for the DTCC to offer a blockchain but remain relevant.

He says the firm could implement a decentralized ledger that eliminates the need for broker-dealers, but still needs to be funded, hosted and maintained by a centralized, experienced authority. "Maybe that’s their role," he added.

As it turns out, the DTCC has a history of surviving and thriving amidst technological disruption.

Founded with its current name in 1999, the company is the result of a merger between the Depository Trust Company (DTC) and the National Securities Clearing Corporation (NSCC), both of which were founded after the 1968 Wall Street paperwork crisis.

At the time, accelerating exchange rates made the old way of trading physical documents untenable and the organizations built technology that helped digitize the process. Now in 139 countries, the DTCC processes more than 100 million digital transactions a day.

In spite of that experience, and the research his firm is helping conduct, Palatnick acknowledges that with every call he takes from a vendor conducting a blockchain experiment he learns more about how the technology might impact his own company’s bottom line.

Palatnick concluded:

"I would love to be able to hit that fast forward button and see what things are going to look like in a year. So I’d be able to aim all our resources at it."

Image via DTCC

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