A new working paper from the SWIFT Institute studies the potential impact of mutual distributed ledger technology (‘blockchain’) on post-trade processing global securities markets.

The paper, “The Impact And Potential Of Blockchain On The Securities Transaction Lifecycle”, has been penned by Michael Mainelli of Z/Yen Group and Alistair Milne, School of Business and Economics, Loughborough University.

The research finds that while the use of blockchain to validate operational data in mutual distributed ledgers can yield substantially reduce both cost and risk, the concept of data sharing itself is far from new. It says that although current interest in mutual distributed ledgers has established significant momentum, there is a danger of building “unrealistic expectations”. The paper emphasizes that achieving all the potential benefits from mutual distributed ledgers will require board level buy-in to a substantial commitment of time and resource, and active regulatory support for process reform, with relatively little short term payoff.

Noting the popular argument often put forward that the employment of mutual distributed ledgers can substantially reduce the high costs of post-trade processing (much of which arises in data reconciliation and in manual intervention in operational processes) the paper says that considering the costs of other processes – KYC, AML, corporate actions and trade allocations – it appears that mutual distributed ledger technologies could save global securities markets many tens of billions of dollars per year.

However, it said that the argument that the adoption of mutual distributed ledgers will bring about near real-time settlement (T + 15 minutes instead of the current T+2 days for equities trades) is “fundamentally confused”.

“Existing centralised settlement on central securities depositories already support virtually instantaneous settlement once all the preparations such as positioning of securities and cash are completed. Near real-time settlement can be achieved simply by requiring all these steps to be taken prior to trade and does not require moving settlement onto mutual distributed ledgers”, the authors added.

It further said that adoption of mutual distributed ledgers will require the updating of a range of different business processes and data sources in a coherent way, implying that the scale of change to see effective and widespread adoption is large.

With regard to ‘smart contracts’ – embedded code that can support much greater process automation – the authors believe that it will only be fully realized over the long-term.

Mainelli and Milne concluded saying, “To conclude, honouring the full promise of mutual distributed ledgers will not come automatically, easily or cheaply. Agreeing the required investment will require engagement and commitment at board level across both the buy side and sell side of the industry and for regulators to play an active rather than passive role, for example requiring the adoption of shared data arrangements for regulatory reporting or putting central bank reserves used for final settlement of cash payments onto a mutual distributed ledger. The return will then come from substantial improvements in operational efficiency that can be enjoyed for many years to come”.