Blockchain technology has been in the limelight of changing the status quo in banking and stock exchanges.
As such, the technology comes in to change transaction processes, for instance, issuing securities, trading, clearing, and settlements that could be handled in no time, without much friction.
Many stock exchanges across the globe are considering introducing blockchain to their operations. The London Stock Exchange, the Australian Securities Exchange and the Tokyo Stock Exchange are already experimenting with this distributed ledger technology for securities trading.
In line with it, Israel is marching ahead towards its first central securities lending pool built on blockchain technology. The Tel Aviv Stock Exchange (TASE) announced its plans to launch a blockchain-based securities lending platform this November.
The platform will serve as a significant function to the country’s capital markets that is currently in need of a central system for securities lending.
Orly Greenfeld, senior vice president and director of the TASE clearing department, said in a statement, “Blockchain technology will enable securities lending trading while securing information and supporting the increase in the number of transactions.”
TASE said in a statement that the innovative system will change the securities lending market by “enabling direct borrowing” among investors across a wide range of major financial instruments.
The Tel-Aviv exchange first announced the blockchain platform development in May 2018, built on Hyperledger Sawtooth. The exchange has collaborated with tech giant Accenture, Intel and Israeli fintech firm The Floor.
Intel’s vice president Rick Echevarria, said at the time that the company “believes blockchain can transform business processes.”
Israel has been the hot spot for disruptive innovation for more than a decade. Especially, the city of Tel Aviv, has positioned itself as a global leader for innovation and blockchain adoption in particular.
The country’s securities lending market is reasonably developed, with TASE looking to improve and advance it further with its new blockchain platform.
According to Greenfeld, Israel could gain a much more sophisticated securities lending market if they were able to create “one centralized automated and transparent system, that is open to the whole market.”
She said that the launch of a blockchain-based securities lending pool would allow each participant to directly access the securities market.
“We call this new product ‘central securities lending’. This new product will generate an automated, transparent and efficient lending market and that’s the way we hope to increase the volumes of this market,” she added.
With the platform, Israel can mobilize assets more quickly, with reduced settlement risks, operational risk and credit risk, she noted.
Talking to ABR, Tomer Ravid, co-founder of Israeli crypto tax optimization and calculation solution BloxTax said, the lending pool would “make short-selling much more easier in the stock market.”
Buying and selling of securities isn’t particularly streamlined as multiple counterparties including exchanges, global custodians and central securities depositories (CSDs) are placed between issuer and investor. Also, there are additional frictional costs of trading.
Here is where a peer-to-peer (P2P) service pops-in. Now individual owners of stock should be able to easily and cheaply lend their shares directly to others, earning a fee in the process.
Various experts see blockchain adoption as a potential solution to these challenges. Blockchain among Stock exchanges in the Asia Pacific region are picking up some of the slack. They are integrating this embryonic technology into their core systems and activities, thus rapidly gaining ground on its adoption in the trading and post trade space.
Malaysia for instance, has adopted blockchain for borrowing and lending of securities. Bursa Malaysia, the country’s stock exchange, announced in November 2019 that it has completed its first blockchain-based proof-of-concept (PoC) for efficient and swift securities lending pool.
Bursa Malaysia Chief Executive Officer, Datuk Muhamad Umar Swift saw securities borrowing and lending markets as a “key characteristic of a developed capital market.” He noted at the time of completion of the PoC,
“As such, it is imperative that we tackle the operational challenges of today with a technologically driven solution that is flexible and scalable into the future.”
Singapore has also joined the blockchain club, integrating the nascent tech into its core infrastructure. The local regulator – Monetary Authority of Singapore – recently announced a collaboration effort dubbed “Project Ubin” that uses blockchain for clearing and settlement of payments and securities.
The Australian Securities Exchange (ASX) is another harbinger of blockchain developments. The exchange has replaced Clearing House Electronic Subregister System (CHESS) with distributed ledger technology (DLT) for greater benefits such as market efficiencies, reduced reconciliation, timely transactions etc.
Given the present state of securities lending market, it shouldn’t be a surprise that financial institutions and exchanges are working on putting this entire process onto blockchain.
Anticipated improvements in the near future could primarily arrive in the form of lower trading costs and solutions to risks involved, which will lead firms and exchanges accumulating healthier returns.
According to a report by JP Morgan, blockchain has moved beyond experimentation and use in payments, with stock exchanges embracing its efficiency around settlement/clearing and securities lending.
“In the long run, as the pool of tokenized securities grow, we believe digital exchanges could put pressure and increase competition among the traditional brokers and asset managers,” the report said.
Sources: TASE, BursaMalaysia, MAS, ASX, JPMorgan
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Sujha has been writing and reporting on cryptocurrencies and blockchain technology developments since 2014. Her work has appeared in CoinDesk, CCN, EconoTimes and Fintech News Malaysia. She is also an accomplished Indian classical singer and loves baking cakes.
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