Bitcoin Technology’s Next Big Test: Trillion-Dollar Repo Market

Bitcoin Technology’s Next Big Test: Trillion-Dollar Repo Market


Depository Trust & Clearing Corp., a firm at the center of Wall Street’s trading infrastructure, is about to give the technology behind bitcoin a big test: seeing whether it can be used to bolster the $2.6 trillion repo market.



DTCC said in a statement Tuesday that it will begin testing an application of blockchain, the digital ledger originally used to track ownership and payments of the cryptocurrency bitcoin, to help smooth over problems in the crucial but increasingly illiquid corner of short-term lending markets known as repurchase agreements, or “repos.”

Repos play a critical role in the financial system by keeping cash and securities circulating among hedge funds, investment banks and other financial firms.

DTCC, an industry-owned utility that helps settle trades in the repo market and elsewhere, wants to apply blockchain technology to the market, so that lenders and borrowers can keep track of securities and cash flowing between firms in real time.

To test blockchain’s ability to improve repo trading, DTCC has tapped Digital Asset Holdings LLC, a startup run by former J.P. Morgan Chase & Co. executive Blythe Masters. Earlier this year, DTCC invested in the firm focused on blockchain applications, along with a range of banks including J.P. Morgan, Goldman Sachs Group Inc., and others.


Typically in repos, money-market funds lend cash to brokers in exchange for bonds and an agreement to buy back the securities later at an agreed-upon rate. During the financial crisis however, problems in the repo markets were singled out for their role in the demise of Bear Stearns and Lehman Brothers Holdings Inc.

Now, big banks have been shying away from facilitating some repo trades due to new regulations that curtail the firms’ ability to take risks.

Murray Pozmanter, managing director and head of clearing services at DTCC, said in an interview the new arrangement with Digital Asset should help because the ledger would provide a way for all firms to agree on trade terms more quickly.

Currently, he said, traders have to process two legs of each trade separately: one for the borrower to deliver securities in exchange for cash, and the other in which DTCC unwinds the trade. While the trade is in motion but not yet completed, the banks involved can take on risk.

Using blockchain in the area is still at an early stage and may not be rolled out fully if regulators have concerns or if the banks don’t fully embrace the concept. Repo traders ultimately may be slow to embrace changes that they fear could be cumbersome or hurt their competitive position.

But some bankers have been eager to explore blockchain as a way to save money and to make it easier to meet capital rules that apply to the trades. Autonomous Research estimates that $120 billion worth of capital annually is tied up in transactions between Wall Street firms, and that blockchain could reduce that by $6 billion. Those billions could be returned to shareholders or used to fund more profitable activities.

DTCC officials say they may roll out blockchain technology to other markets outside of repos. Startups such as Digital Asset, and itBit Trust Company LLC are competing with each other and with banks’ own internal efforts to launch new blockchain-based systems. Working with a utility such as DTCC could be a shortcut to becoming a default technology, says Ms. Masters of Digital Asset.

“Working with DTCC is much easier than going to talk to all the participants in the repo market separately and persuading them to adopt a new technology,” said Ms. Masters, who was appointed Digital Asset’s chief executive last year after a 27-year career at J.P. Morgan that included stints as head of global commodities and chief financial officer of the firm’s investment bank.

Even if blockchain does speed up repo trading by a few seconds, the market is grappling with other issues. The Wall Street Journal reported late last year that DTCC is seeking $50 billion in commitments from member banks and trading firms as a credit line to shore up the finances of its subsidiary, the Fixed Income Clearing Corp., which clears repos already between big banks and broker-dealers.

DTCC’s fixed-income unit is also considering expanding its membership to large investment firms and money-market funds.




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