Financial Market Infrastructures have time and again impacted all parties involved. In such unprecedented times and in the midst of disruptive transformation currently shaping the entire financial service industry, financial market infrastructure will not stay immune for much longer. In light of the GameStop and AMC fiasco, legacy infrastructure was shoved into the limelight once again. To understand the impact of such infrastructures and also discuss alternatives, we interviewed Benjamin Soh, Co-founder & Managing Director of STACS.
The last few weeks have catapulted GameStop and AMC into the spotlight. It also shed light on the legacy infrastructure and systems that financial markets operate in. What according to you is the most significant take-away from this event?
Benjamin Soh: The latest retail trader outrage on the back of the GameStop and Robinhood fiasco shows that now is the perfect moment to champion technology-driven alternatives. The reality we are living with is that trade settlement infrastructure in 2021 still requires financial institutions to post billions of dollars each in capital requirements, while settlement times can take up to multiple days and involve multiple parties. The result is an inefficient, costly, and cumbersome hidden back-end to capital markets that the popular retail broker was on the sharp end of two weeks ago. Further, as many inside the industry are already aware the technology to solve this problem for clearing houses, regulators, and financial institutions (banks, brokers, and exchanges) is already here.
Speaking of legacy systems, what are some of the current alternatives that financial markets can adopt to address these problems?
Benjamin Soh: Blockchain or distributed ledger technology (DLT) shows the most promise in delivering instant clearing times and dramatically reducing capital requirements as well as parties involved. Let me share more with you on exactly how it works, and some of the implementations we have done with institutional partners, below…
Could you please elaborate on how STACS fits into this picture? What are some of the problems that STACS could address with regard to financial markets?
Benjamin Soh: Unfortunately, the financial markets have operated in the same way for the last 50 years. Since the 1970s, the capital markets have been fragmented, where institutions operate on different systems and ledgers and go through a linearly dependent process where settlement takes between 2 to 14 days depending on the asset class. This leads to US$800 bn of capital being locked up every single day in the clearing system. With multiple layers of processing, US$300 billion is being spent every year on transaction costs, and this model isn’t even effective. Further, delay in settlements leads to fines being paid in millions of dollars. As we saw in the Robinhood/Gamestop, such failures can potentially affect every participant.
This is where we really come in…STACS works by offering multiple options of connectivity for financial institutions via our front-end applications built specifically for finance use cases (trade lifecycle management of bonds, structured products and derivatives), API integration between existing platforms (i.e. Aladdin, Murex, Omgeo), and the STACS Settlity infrastructure as well as node-to-node integration. Our proprietary platforms mirror financial processes on the blockchain (distributed ledger) so that things like trade settlements and clearing are captured in a decentralised environment.
Could you take us through of any case studies that STACS has developed in recent times?
Benjamin Soh: We’re really excited to have had the opportunity to work with some great institutional partners in the past few months. In December, we completed a blockchain proof-of-concept with Malaysia’s national stock exchange, Bursa Malaysia, to facilitate the growth of the bond marketplace at the Labuan Financial Exchange. Together with CCB Labuan, CIMB and Maybank, we simulated several bond issuances which were all issued and managed on the STACS Blockchain. Using our Trident Blockchain-based platform developed, bond templates were mirrored onto smart contracts for rapid deployment, while operational workflows were streamlined to increase efficiency and flexibility in settlement cycles. The creation of a blockchain powered infrastructure will provide a single source of information that is kept in a shared distributed database between Bursa Malaysia and participating banks. Further, this provides a registry of ownership and reducing counterparty risks and reconciliation costs.
In January, we partnered with Deutsche Bank to jointly explore a project related to the technological and practical feasibility of digital assets interoperability, liquidity, cross-border connectivity, and smart contract templates, including the support of sustainability-themed digital bonds.
Earlier this month (February) we partnered with Eastspring Investments and BNP Paribas on a successful implementation of a first-in-market blockchain-driven solution to enhance trade lifecycle management capabilities for exchange traded derivatives (ETDs). The trading fee calculation platform, named Mercury, addresses current inefficiencies in the trade lifecycle management of ETDs. ETD contracts are complex and require multiple inputs to calculate broker fees, which can lead to trade breaks and many hours of investigation and reconciliation work. Within the first month of the implementation, 84 percent reduction in trade breaks was observed and a significant four-hour per day reduction in non-value-added reconciliation work, with reduced risk of errors in client reporting was also noted.
Finally, we are proud to become a portfolio company of PwC Singapore’s Venture Hub programme. The partnership will bring about synergies between our two firms, while helping to elevate trust placed in distributed ledger technology by the financial services industry and driving adoption.
Finally, as technology and digital transformation shapes other segments of FSI, what are the key areas ripe for disruption in the financial markets?
Benjamin Soh: Apart from fixing this issue of instant trade settlements, we see a really big opportunity in the area of ESG and Green Fintech. We are working towards building efficient techniques of launching of green bonds and green loans to mobilise capital, improving impact monitoring for transparency, and instilling stronger investor confidence in general.
To take this initiative further, we launched GreenSTACS – a platform that is developed on our blockchain core and allows physical Green financing use cases to now be integrated seamlessly to the financial institutions and their infrastructure. For example, Green Bonds and Green Loans can now be digitally issued in a more flexible, cost-effective and rapid manner, while the management and disbursement of proceeds can be enforced more effectively via the use of smart contracts.