State Street, Vanguard, Execute Live Smart Contract FX Trade
Posted by Colin Lambert. Last updated: December 7, 2021
State Street and Vanguard have completed the margin calculation process for a live trade of a 30-day FX forward contract through the use of Assembly, Symbiont’s distributed ledger technology.
The firms have been actively exploring the application of blockchain technology to undertake margin processing for FX forwards and swaps, with the goal of bringing post trade workflow automation and efficiencies while significantly reducing counterparty credit risk in the OTC market.
The firms say that harnessing the benefits of blockchain technology within the largely manual currency forwards market will eventually enable the underlying contracts to also be instantiated, signed, executed and documented on a single unalterable record, digitally securing the trades and allowing for automation over their duration.
“State Street Digital is incredibly pleased to have collaborated with both Vanguard and Symbiont on this monumental industry initiative to digitise the margining process around collateralised foreign exchange forward contracts that will reduce our customers operational challenges through process automation and state of the art technologies,” says Nadine Chakar, head of State Street Digital. “Our newly launched division, State Street Digital, was created to help drive innovation and address the industry’s digital transformation. We appreciate the joint collaboration on this project and look forward to future partnerships and further developing our digital capabilities for the crypto and digital assets environment.”
Warren Pennington, head of Vanguard’s investment management fintech strategies group, adds, “Vanguard is committed to improving outcomes for all investors, whether through lowering the cost of investing or reinvesting in new services and innovative capabilities. 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 standardised calculation processes. The lower risk and increased speed will lead to lower costs and improved outcomes for investors.”
The firms say that deploying these contracts on DLT facilitates more frequent and automated valuations, while also enabling parties in the network to move and settle collateral instantaneously — significantly reducing counterparty risk and streamlining processes for those forwards that are non-cleared and subject to margining.
“Today’s announcement marks a transformative time for financial services and signals the evolution of blockchain as the ideal technology solution for foreign exchange contracts,” says Mark Smith, CEO of Symbiont. “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.”