For months we’ve heard sell-side institutions tout blockchain as the best thing ever, but what does the buy-side think of the technology? We spoke to Suren Chellappah at Sanford C. Bernstein.
What do you think the buy-side’s perception of blockchain technology and its possible uses are?
New technology is of interest to the buy-side, not just for what it means to their business and how they can reduce risk and costs, but also in terms of investment returns i.e. ‘should I be making an investment in fintech for the extra alpha it can generate for my investors?’. Take our firm as an example, we set up an in-house FinTech innovation lab to look at disruptive technologies, of which blockchain distributed ledgers is an example. Other areas we are looking at include roboadvice, payment systems and big data. Hence firms are taking an interest both from their operational side, and also through their strategic investment arms.
Where do you see blockchain being implemented in the capital markets?
I can see it being used in many places. As an example, I recently had conversations with a firm looking to introduce T+0 settlement in the US, so I can see it being used in clearing and settlement of equities and also for various other asset classes such as trade finance and gold. The distributed ledger has the capacity to be used across multiple products any time you have an extended settlement period, thereby bringing automation, speed, reduced risk and lower costs.
Do you see any barriers to blockchain being introduced?
I think there will be a number of challenges. When you are short-selling, if you have lent stock out you need to make sure you have received it back before you sell it, because if the settlement is going to take place in a matter of minutes or even at the end of the day you need to make sure you have it in order to settle it. Will there be any kind of impact on the lending market – that will be something to work out in terms of there being any restrictions on short selling? Another issue is if you have near-immediate or same-day settlement, are you leaking too much information about ownership into the marketplace, and would that adversely affect the price if you are looking to unwind a large block over a few days. Netting has brought huge operational and cost benefits to date. How do we ensure these are not lost because in a T0 world we may end up settling each transaction thereby increasing volumes and potentially transaction charges. A sell off might be exacerbated. The 2-3 day settlement cycle does give investors time to consider their next move as they typically like to see what they own before they sell. This has the effect of ‘cooling’ any rush to sell. In a near time settlement environment you will be able to know your positions same day and probably intraday which will allow you to sell more quickly.
Do you think the general attitude towards blockchain is positive?
People understand that if you can get the technology right and solve these challenges, then this technology can bring huge reductions to both risk and cost. Therefore it is particularly of interest to asset managers and broker dealers from a positive perspective, and a concern from clearing agent banks’ perspective. I had a conversation with a head of sales at a clearing agent who said in 15 years time, he would be hard pressed to see his business existing as counterparties settled directly with each other in near real time. Blockchain has the ability to remove the trusted middlemen role that many agents play on the clearing side. Possibly a few years down the line people could be getting out of this business rather than be left as the last man standing.
Do you see it being 10-15 years times before implementation?
No, I think you will see aspects coming into force within the next two-three years. People are trying simpler use cases before they take it to bigger markets such as equities clearing. For example, you have the R3 consortium where there are over 40 banks that have come together to try and agree common protocols/ standards and develop distributed ledger technology to trial between members. These use cases – if successful – will embolden and expedite the push to take the technology out to a bigger arena. I think in 2-3 years we may see blockchain in areas such as shareholder voting for example.
Are there enough blockchain experts out there?
I am involved on our FinTech side which is called AB Labs. AB Labs is made up of people with a technology backgrounds, operational and risk backgrounds whilst others have front office backgrounds. Fintech knowledge and skillsets are developing fast in big firms – and we continue to learning as we go. This is all still relatively new and there is a lot of hype around FinTech and distributed ledgers, in some ways it is a solution looking for a problem. Like many of our peers, it is about cutting through all businesses touting their distributed ledger capabilities to see who has something tangible, what are their use cases and seeing if it sounds sensible, before taking a really deep dive at that list of 10-15 names that could be credible.
Buying into the blockchain hype
For months we’ve heard sell-side institutions tout blockchain as the best thing ever, but what does the buy-side think of the technology? We spoke to Suren Chellappah at Sanford C. Bernstein.