DTCC, Digital Asset complete proof-of-concept for repo transactions using DLT

55 Water Street in the Financial District of Manhattan, New York City, with its 15-story north wing, as seen from the East River. The building is the headquarters for Standard and Poor’s, EmblemHealth, FXCM, and Depository Trust Clearing Corporation (DTCC).

American post-trade financial services company Depository Trust Clearing Corporation (DTCC) announced in a press release CoinReport received the successful completion of a proof-of-concept to better manage the netting process for U.S. Treasury and agency repurchase agreement (repo) transactions using blockchain or distributed ledger technology (DLT).

DTCC is working with Digital Asset, a developer of DLT solutions for financial institutions, on the project. The two companies showed for the first time the successful netting of “start” leg repo transactions with previous end-of-day net securities obligations in the DTCC environment.

Following Phase One of the project, Digital Asset and DTCC will now, in Phase Two, organize a Stakeholder Working Group made up of top market partakers active in the $3 trillion per day U.S. repo and relevant transaction market to gather independent feedback and make sure the solution addresses requirements of the industry. In this phase, it will also be determined whether the solution meets the integration and performance requirements of DTCC’s technology environment while providing integration with member companies. The phase is projected to be completed by June, at which point, DTCC will decide whether to move forward with the effort’s development phase.

DTCC president CEO Michael Bodson said in the release we received, “We are very pleased with the results from our repo proof-of-concept effort with Digital Asset, and we see this project as another validation of the potential of this exciting, emerging technology. DLT was chosen because of its real-time information-sharing capabilities, enabling all parties to quickly view repo details after trade execution lowering risks and costs while enabling users to take advantage of the benefits of a central counterparty. Digital Asset has been a strong partner in this work, and we are excited to move to Phase Two with them.”

The central counterparty process extends several advantages for repo processing and is aligned with standard accounting practices that lower risk and cost and increase liquidity. Although presently DTCC’s Fixed Income Clearing Corporation (FICC) delivers the matching and verification of repo transactions, just the “close” leg of same-day settling trades is netted and settled by FICC, with the “start” leg settling outside of the system. In this project, DTCC pursues netting of the “start” leg also, cutting down on settlement costs and risk to members further by providing further netting and offsets.

Thanks to the solution, DTCC will be able to calculate a new net settlement amount at a point in time and record it in an unmodifiable, transparent and secure blockchain that can be utilized by FICC for new net securities and cash obligations with its member companies. Regulatory approval will be required to make any changes to FICC’s repo processing rules.

Digital Asset CEO Blythe Masters said, “We are delighted to be working with DTCC towards the first industrial-scale implementation of distributed ledger technology for the $3 trillion per day repo market. As repo volumes continue to grow, Phase Two demonstrates DTCC’s on-going commitment to leveraging DLT for the benefit of their clients, making this one step closer to being a reality.”

Image credit – Beyond My Ken  (CC BY-SA 4.0)