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Distributed Repo

Distributed Repo

Imagine a world where all participants on a repo transaction share a single view throughout the lifecycle of the trade. Where having a single source of record on a platform that defined the rules of the market meant that fails and disputes were nearly eradicated. Where true simultaneous settlement decreased the capital requirements needed to trade. Imagine that this platform was built by a neutral and trusted market solutions provider.

FTF winner

This was what we set out to do by building a distributed ledger technology (DLT)-based repo platform aimed at driving efficiency for the capital markets and mutualizing costs for the benefit of all market participants. Given Broadridge’s existing reach and network, we identified the repo market as an optimal use case for DLT. Shortly after beginning work on the distributed ledger repo platform, Broadridge was granted a patent in May 2018 and won the FTF News 2018 Best Blockchain Initiative for the solution.

Feedback on our approach from existing market participants and potential new players further validated the market benefits of this platform. After testing the feasibility of various technology providers and DLT platforms for our repo solution, we’ve emerged with our partnership with Digital Asset. Our collaboration is built on a shared vision to transform the way repo trades are captured, processed, cleared, and settled globally. Using DAML, Digital Asset’s open-source smart contract language, specifically designed to model and execute multi-party workflows, we have been able to rapidly build upon this vision.

We specifically chose to build the solution on DAML with Digital Asset for two reasons. The first is that DAML was created by a team with significant experience in building critical market infrastructure. DAML provides functionality vital to aspects of the repo market which are not available with other smart-contract languages, including its treatment of privacy, and compliance with local and international contract law. Additionally, it allows us to clearly state and enforce market rules as part of the underlying code.

The second reason we chose DAML is that it is designed to abstract away a significant amount of the underlying detail of running a DLT platform. This allows the development team to focus on the core business logic, as opposed to spending time on the infrastructure details. For market participants, this means that we are creating a solution with significantly more functionality than what is available in the market today. These enhancements include, but are not limited to, custody agnostic inventory availability, self-directed optimization, and unbound collateral mobility. Collectively, this will lower operating risk and lead to balance sheet and capital efficiency.

Distribution Repo Image 1

We are excited that early next year, the platform will support live trading, with a broad set of day-1 participants from the broker dealer and asset management community able to immediately realize the efficiency and risk reduction benefits. These innovative institutions have worked with us to fundamentally change the way transactions are processed in the repo market.

While we continue to build the application for production release, we are driven by the following design principles:

  • Establish a single source of truth for repo trades to decrease or completely remove the high number of disputes and fails
  • Define a rollout approach that allows participants to transact with counterparties on and off ledger to enable a phased transition and broader adoption
  • Establish collateral management functionality currently only available for tri-party repo in the bilateral repo market, including optimization
  • Reduce custodial costs and transaction fees, as well as legacy infrastructure cost by modernizing available technology across the market to mutualize industry cost

The DLT-based platform presents significant opportunity for clients. Currently, processing a trade from initial start-leg settlement through to midlife events and eventual maturity requires manual reconciliation and intervention. Using the Broadridge platform, these actions can now be automated, effectively eliminating a significant portion of operational overhead, paving the way for market infrastructure change that would allow for capital costs decrease, due to the simultaneous settlement of cash and securities.

Broadridge’s footprint and track record in the fixed income space, where we process repo transactions for 19 of the 24 primary dealers, combined with Digital Asset’s expertise in repo and collateral management, ensures that the platform was designed with real-world applications in mind. With data and workflows standardized and interactions across counterparties streamlined, participants can now focus on higher value functions.

We look forward to welcoming additional participants to the platform to further establish a safer and more efficient operating market. As we continue our path towards production, we plan to support [new asset classes, build-out enhanced functionality and mobilize under-utilized collateral around the world.

Ultimately, the more participants and functionality we bring onto the network, the more liquidity and benefit we bring to the market. Together we are building the right platform to meet market needs and testing the bounds of what the market believes is possible today.