Vanguard, in collaboration with technology provider Symbiont, and in conjunction with Bank of New York Mellon, State Street, and Franklin Templeton, says it is actively exploring the application of distributed ledger technology (DLT) to FX forwards in an effort to increase transparency and workflow efficiencies to the currency market.
As part of this pilot, Vanguard has simulated multiple 30-day FX forward contracts with its partners in the initiative – a proof of concept that is reflective of how the firms would conduct the first test trades of FX forwards on a DLT network in the future.
“For more than two years, we’ve been developing blockchain use cases to help transform the capital markets,” says Warren Pennington, principal and head of Vanguard’s Investment Management FinTech Strategies Group. “The current environment emphasises the need to streamline, automate, and secure critical business processes. When procedures are highly reliant on manual intervention and disconnected operations, it makes the markets vulnerable to disruption from crises and even simple manual mistakes.”
The firms say harnessing the benefits of blockchain technology within the largely manual forwards market will enable the contracts to be executed and documented on a single unalterable record, digitally securing the trades. It will also give parties in the network the ability to value, move and settle collateral instantaneously – thus reducing the risk of payment delays and streamlining processes for those forwards that are non-cleared and subject to margining.
“Our work towards conducting the first FX forward contract on a DLT is one of a number of use cases we are looking at in our efforts to modernise trade lifecycles and improve the client experience,” says Jason Vitale, head of FX at BNY Mellon. “We think this partnership with Vanguard is an important step for the FX market, further automating end to end workflows”
Dean Sakati, head of product innovation and business development for State Street Global Markets, adds, “State Street is pleased to engage with Vanguard and Symbiont on this initiative to digitise the supporting process around collateralised FX forward contracts. Our firm’s digital strategies overall are centrally focused on reducing our customers’ operational challenges through both process automation and by utilising state of the art technologies that drives efficiency and growth, and we believe this pilot will help us further achieve that goal.”
Since December 2017, Vanguard has been working with Symbiont to simplify the data management process by leveraging Symbiont’s blockchain platform, Assembly. The partnership has enabled index data to move instantly between index providers and market participants over one decentralised database, resulting in improved benchmark tracking and cost savings for clients. Earlier this year, Profit & Loss published a feature asking whether the blockchain solution could change how FX trades, and recently Vanguard and Symbiont announced a pilot to bring similar efficiencies to the asset backed securities market.
“This platform is another example of how we’re transforming capital markets infrastructure through blockchain technology,” says Mark Smith, CEO of Symbiont. “Vanguard is an example of a forward-thinking financial services institution that is helping accelerate necessary change in the FX markets. This is not just about innovation – but about bringing much-needed efficiency and automation to this asset class.”