FMIs embrace AI and robotics but the jury is still out on DLT and blockchain
New technologies take up rapidly, also in the MI (Market Infrastructure) space. They appear in multiple shapes and forms and address problems that often still need to be discovered.
Will the winners be driven by an efficient community take up of DLT, big data analytics and APIs, or by individual investments, such as AI, machine learning and robotics? What role will competition forces play in this take up? Where will MIs invest first, knowing they are starting to lose their monopolistic position? Will new technologies also address new functionality requirements such as synchronisation of settlement across jurisdictions, interoperability between low and high value systems, new liquidity management functions?
The entire post-trade industry has been following the development of new technologies such as cloud computing, big data, APIs, robotics and artificial intelligence for some time now. These technologies will support improved efficiency and security and will therefore have an impact on the way financial market infrastructures (FMIs) offer their services, which in turn will have an impact on their participants.
Automation, integration of processes, sharing of resources, interoperability between market infrastructures, easier access to data, data management, cybersecurity: all these areas are being explored and solutions are being implemented. These solutions are creating process and cost efficiencies that support the development of new services and improved client experience; and are also a source of additional revenues for FMIs and their participants. Cyber security is at the centre
of industry concerns and developments are closely monitored by supervisors, especially when considering systemic players, among which the main FMIs are numbered.
The more the industry uses technology such as big data and AI, the more it can improve capabilities, such as more accurately anticipating liquidity needs and better allocating collateral.
Head of Strategy, Market Infrastructures and Regulation, Societe Generale Securities Services
The technology about which there is still doubt, as far as FMIs services are concerned, is distributed ledger technology (DLT)/blockchain. For some years, the industry has debated whether blockchain is hype or reality – that debate is still relevant. For all the discussions about the tremendous potential of
such technology in the area of capital markets in general and post-trade activities in particular, there has been little in the way of progress.
The technology remains nascent, its functionalities are limited and scalability is a key concern. In general, settlement is done on a delivery versus payment (DVP) basis but DLT/blockchain is not yet proven to be able to provide such a capability, nor to manage the volumes required. Actually, the blockchain technology and conceptual model (public blockchain) that support crypto assets as Bitcoin, require a high level of IT power to enable a low volume of transactions to be processed – well below the capacity of trading venues or settlement systems such as T2S. DLT/blockchain cannot yet compete with the level of service provided by market infrastructures today: a platform like T2S, for example, offers high levels of scalability, security, standardisation, market consensus, overall efficiency, and risk management.
DLT/blockchain is often promoted as a technology that can bring automation to inefficient and manual processes or can deliver transparency where it is lacking. But the solutions to date are at a primary stage and require successful adoption by the wider market community; but we need to keep our feet on the ground and resist the siren call of such an unproven technology. Moreover, such solutions are competing with more established FMI solutions.
The challenge for DLT and blockchain solutions is to reach the right level of technical and functional maturity and to identify the most appropriate business model; only then will such solutions achieve the necessary critical mass.
This will not be achieved in the short or medium term – I believe it will be much further into the future. T2S took 11 years to deliver and the financial market community invested heavily in it. This is not an investment that will be abandoned lightly in favour of DLT and blockchain.
Any attempts to develop blockchain-based settlement infrastructures could also hamper the integration of Europe’s financial markets and the consolidation of infrastructures. There are still 152 trading venues in Europe and about 17 CCPs and 42 CSDs and SSS; the industry is far from having succeeded in reducing the number of FMIs. A new blockchain-led initiative could add to this fragmentation and delay the benefits of cost reduction that consolidation could bring.
Doubts about DLT and blockchain aside, FMIs are deploying new technologies to deliver more efficient, secure and lower cost services for participants. The more the industry uses technology such as big data and AI, the more it can improve capabilities, such as more accurately anticipating liquidity needs and better allocating collateral. A far-reaching objective is to use such technologies, standards and remote capabilities to help above all achieving European financial market integration.