Treasury Today Country Profiles in association with Citi

Blockchain sets it sights on the OTC market

Coin operated binocular viewer looking over the water in Antalya

Last month, India based trading technology company uTrade announced the launch of its uClear blockchain solution for real-time clearing and settlement in financial markets. Here, Founder and CEO Kunal Nandwani discusses the solution and how treasury may benefit.

Few now doubt that the blockchain (otherwise known as the distributed ledger) is a powerful tool with the potential to disrupt financial services. But following the initial explosion of interest, hype has subsided somewhat as more pressing issues dominate the minds of the industry.

But there is, a slow, but steady stream of use cases emerging, and, in some cases, being launched. One of the most recent of these is the uClear blockchain solution for real-time clearing and settlement in financial markets.

The solution, developed by the Indian based open source financial trading technology company, uTrade, is the first solution of its type to reach the market and it has been adopted by the innovative UK-based Global Markets Exchange Group (GMEX) who will integrate the solution across its over-the-counter (OTC) segments without existing central clearing infrastructures.

In a press release, Hirander Misra, CEO of GMEX Group said: “We are excited by blockchain’s potential and are in line with GMEX Tech’s focus on fin-tech innovation and we are exploring a hybrid model.” He further added: “This helps both GMEX Group and our exchange clients to adapt in an era of rapid change and facilitates greater transparency for the regulators. We look forward to continuing our partnership with uTrade as we work towards the evolution of hybrid market infrastructure.”

A pressing need

Originally, uTrade specialised in building trading solutions for brokers, trading firms and buy and sell side clients. However, according to Founder and CEO Kunal Nandwani, this market has become commoditised with many firms offering similar solutions.

The team at uTrade therefore set out to evolve the company and realised that an obvious use case existed for utilising the blockchain around post-trade clearing and settlement. “On any stock exchange or outside the exchange, there is lots of trading taking place which is typically backed by legacy infrastructure that is highly inefficient,” explains Nandwani. “As a result, settlement of these deals typically takes two to three days.”

Here, the uClear solution steps in, which allows any exchange-matching or OTC market engine to clear and settle trades instantaneously post execution through a private blockchain, across equities and futures, with real time risk management, reporting and other financial transfer instructions.

The solution looks to eliminate this lag and clear trades within seconds without the need to use the legacy infrastructure utilised by many exchanges at present. “The aim is to make this process much simpler, easier, efficient and faster,” adds Kunal. “To begin with, GMEX and ourselves are working on how it can be used to clear futures products. But the potential is there to use it for any product that can be traded, including FX and Bonds.”

Take note treasury

Whilst the immediate impact on corporate treasurers may be limited and not felt directly, uTrade have plans to develop the product further to assist corporate treasuries with their FX trading activities.

“The solution lends itself well to the FX market, we believe,” adds Nandwani. “At present corporate treasurers typically trade FX OTC and take counterparty risk against each other. A blockchain clearing platform can assist by not only making this process more efficient, but also by creating certainty and thus mitigating some of the risk each party takes.”

Nandwani stresses, however, that this will take some time to develop. “We are firstly testing the water with the uClear solution that we have built, and still learning as this develops,” he says. “But the FX market is a big area that we have our eye on and we believe that we can make a difference and help corporates in what is becoming an ever more complex space.”

A nod to the future

The team at uTrade, despite the debut of their first product, are acutely aware that there is a long way to go for blockchain based solutions to become mainstream. And a key objective that they have initially is simply to begin changing mind-sets in the industry.

“It is without doubt that blockchain is a fantastic technology,” says Nandwani. “The issue at present is that there are so many ideas, use cases and misconceptions that exist in the market. And there is a danger that because of the hype, there will be failures as companies use the solution incorrectly, in areas where it has limitations.” He also believes that adoption may be slow because of regulation, compliance and also an inertia that exists in the financial services industry.

Indeed, this was a point noted by Edward Budd, Managing Director, Chief Digital Officer, Global Transaction Banking at Deutsche Bank in a blog post on the banks website. Budd said that: “We believe that blockchain has great potential and could transform the business model of many segments of the financial services industry and other industries.” He then when onto note that “the adoption of blockchain will vary according to geographies, regulatory frameworks and the complexity of assets and their implementation, including the cost implications when new and existing technology co-exist for a period of time.”

But change will happen. “I like to compare the period we are in now with the internet in the mid-90s,” says Nandwani. “At that stage there were few who could predict how this would develop and what it would look like today. The same can be said for blockchain and just like the internet, the market will mature and companies who have developed compelling use cases for it will rise to the fore. It is just a matter of time.”