State Street Corporation in partnership with Vanguard and Symbiont have executed the margin calculation process for a live trade of a 30-day Forex forward contract through the use of Assembly, Symbiont’s distributed ledger technology.
The firms have been exploring the application of blockchain technology in margin processing for forex forwards and swaps, aiming to bring post trade workflow automation and efficiencies with reduced counterparty credit risk in the OTC currency market.
The benefits of blockchain technology applied in the largely manual currency forwards market will enable the underlying contracts to also be signed, executed and documented on a single unalterable record, digitally securing the trades and allowing for automation over their duration.
Using DLT in this process facilitates more frequent and automated valuations, while also enabling parties in the network to move and settle collateral instantaneously. This significantly reduces counterparty risk and streamlines processes for those forwards that are non-cleared and subject to margining.
Nadine Chakar, head of State Street Digital, said:
State Street Digital is incredibly pleased to have collaborated with both Vanguard and Symbiont on this monumental industry initiative to digitize the margining process around collateralized foreign exchange forward contracts that will reduce our customers operational challenges through process automation and state of the art technologies. Our newly launched division, State Street Digital, was created to help drive innovation and address the industry’s digital transformation.
Warren Pennington, head of Vanguard’s Investment Management FinTech Strategies Group, added:
We’re excited to partner with State Street and Symbiont on the world’s first ever digital collateral-linked currency forward trade margining process. Leveraging cutting-edge distributed ledger technology represents a giant leap forward in foreign exchange market structure by reducing counterparty risk, automating previously manual processes, and mitigating potential disputes through standardized calculation processes. The lower risk and increased speed will lead to lower costs and improved outcomes for investors.
Mark Smith, CEO, Symbiont, commented:
Our market still manages risk on an overnight basis and lacks an efficient, real-time common infrastructure for valuing trades, calculating margin calls, and moving assets between counterparties as defined by the legal agreements (ISDA/CSA). That hampers the credit both firms are willing to extend to each other and the resulting dealing price. Our solution solves for that by allowing both counterparties to transact and participate in greater size (full amount) and activity based purely on best execution, without fear of increased credit exposure.
