Every financial conference seems to have a panel hyping blockchain, the distributed ledger technology, but the progress of Target2-Securities shows that existing regulators and infrastructures can co-operate to make markets operate more efficiently.
The European Central Bank launched T2S back in 2008 to end the spaghetti of securities settlement across the Eurozone by providing a single IT platform to settle transactions in central bank money across borders, central securities depositories and currencies so there is no difference between domestic and cross-border transactions. A single set of rules and standards apply to all transactions through T2S which reduces the complexity of the market structure and aim to make European markets more efficient and attractive to investors. In addition the ECB wants to use the technology from T2S to develop instant payments in euros.
The first wave of CSD migrations to T2S were between June and August last year and seven markets have joined the platform. Euroclear is due to join in September this year in the third wave, seven months later than originally planned. Deutsche Börse’s Clearstream is slated to migrate in February next year with the final migrations in September 2017 taking the total number of CSDs to 23. Some T2S migrations have been delayed, which is unsurprising with a project of this size and complexity, and highlights how difficult it will be to move the whole financial industry to a completely new technology such as blockchain.
There is no denying that blockchain, or some type of distributed ledger, does have great potential to transform post-trade processes in finance. However Matthew Syed, the former number one England’ table tennis player turned best-selling author, has written about Google running 12,000 data-driven experiments annually to discover small weaknesses and make small improvements. Syed said one of Google’s experiments found that slightly changing the shade of the toolbar to a different blue increased the number of click-throughs and dramatically increased revenues. So while the financial industry waits for the promised land of blockchain, regulators and participants should continue to collaborate to ensure they also encourage other achievable innovations that can still bring real benefits to end-users and consumers.
For example, the UK Financial Conduct Authority has this week launched a sandbox to allow innovations to reach consumers more quickly. The sandbox is a ‘safe space’ in which businesses can test new products, services, business models and delivery mechanisms while ensuring that consumers are appropriately protected.
The regulatory sandbox is part of Project Innovate, an initiative launched by the UK regulator in October 2014, to encourage innovation and promote competition. Christopher Woolard, director of strategy and competition at the FCA, said in a speech last month that since the scheme was launched the regulator has received 400 requests for support and offered direct support to more than 200 firms.
Woolard said new firms requiring regulatory authorisation have previously incurred significant costs before they can meaningfully explore consumer appetite or whether there are any significant risks posed to consumers. In the sandbox firms will be authorised by the FCA to test their ideas within certain restrictions. “If, after sandbox testing, the firm wants to launch itself into full activity on the wider market, it can do so if it satisfies the threshold conditions for that wider activity,” he added. “We think this strikes the right balance – regulation that starts in proportion to the scale of the concept being tested and can grow with the ambition of the full business model.”
Sandbox firms may be offering completely new products for which there is no established market practice and where there is uncertainty over how existing regulation will be applied, In this case the FCA will issue individual guidance for the test. In addition the FCA can waive and modify rules during this period or issue a ‘no enforcement action’ letter. “These letters aim to give firms comfort that as long as they deal with us openly, keep to the agreed testing parameters and treat customers fairly, we accept that unexpected issues may arise and will not take disciplinary action,” added Woolard.
In order to protect customers, the sandbox will only be considered for propositions with a prospective direct or indirect consumer benefit. The FCA will agree upfront testing parameters and customer safeguards and every sandbox firm will need to have a fair exit strategy for consumers – which could be halting the business or transferring customers to third parties. Firms have until 8 July 2016 to apply to be in the first cohort of the sandbox.
Featured image by Little Visuals
