9th Gear is looking to solve a fundamental problem in the capital markets industry: how to settle trades in minutes instead of days. With technological advances, we’ve made great strides to accelerate the timing of trades and reduce error rates and manual intervention. After all, equity trade settlements have been reduced from 5 days to 3 days to 2 days in 2017. But we can do better with technology if we innovate our business/currency practices. Introducing a means to fund and settle transactions within minutes is a game-changer, so making the right technology decisions are critical in order to make the leap from idea to reality.
Gearinghouse™ is 9th Gear’s innovative blockchain technology that will accelerate trading to provide an end-to-end solution to the capital markets industry. Our innovative product allows trading counterparties to pre-fund transactions prior to execution and then settle those transactions within minutes. The solution brings together multiple components: the user interface,complex processing logic to match providers of liquidity with those seeking liquidity, API integration to publish pricing, trade detail and payment information to flow readily throughout the financial ecosystems, and a ledger to serve as the book of record for all actions.
Blockchain is a brand new technology that will change the market and power new business innovations. All major financial institutions are thinking about the technology in various ways: by devoting resources to innovation labs, making investments in start-ups and consortiums, executing POCs or longer term infrastructure work. 9th Gear is looking to combine the best technologies to deliver the various activities in the end-to-end capital markets transaction cycle. Deciding where blockchain fits is both a tactical and a strategic decision. Blockchain technology strategically positions 9th Gear to leverage innovative remittance processing solutions to make payments faster and more economical.
The first consideration in using blockchain technology is a tactical one. At a high level, a capital markets transaction goes through four lifecycle phases: 1) Execution 2) Confirmation 3) Funds/securities settlement and 4) BRC (break, reconciliation, correction). In foreign exchange, the confirmation step continues to be mostly a manual process, and even in highly automated segments, confirmation match rates have not reached 100%. If confirmation is not completed properly, payment exceptions occur resulting in costly overhead, because it takes time to resolve and compensate for loss of use of funds in the BRC process. The use of blockchain has the potential to drastically reduce the two most costly elements of the transaction cycle: confirmation and nostro reconciliation. With blockchain technology, the smart contract and the availability of contract details on a mutual ledger allows for full transparency between the counterparties.
Though it can be reasonably argued that a mutual ledger can be created using traditional technology, blockchain technology has strategic advantages. For example, consider how a foreign exchange (FX) trade is processed today. An FX transaction can be processed through as many as six to eight correspondent banks from payment initiation to settlement. This happens when Counterparty A initiates a FX payment through its account at a community bank. The community bank deals with a major regional bank. The major regional bank accesses the foreign exchange market through a major global bank that is making markets in various foreign currencies. Depending on the currency, that major bank may make payments through a global bank resident in the jurisdiction of the currency. That’s three to four banks involved with just the payment initiation. Follow that transaction with Counterparty B through to settlement and there are another three to four banks to settle the payment. That’s six to eight banks to process just one FX trade! There’s tremendous potential for payment delays and errors, and it’s a costly process because a fee is accessed by each bank handling the FX transaction.
This inefficiency in processing FX payments is recognized by banks and customers alike. It’s an ongoing challenge to complete these transactions accurately and in a timely manner, and an expensive process, even without errors. This is where blockchain can solve many of the issues that banks face. There are already early blockchain innovations available for remittance processing, but these are done using crypto currency as the exchange mechanism. For example, a customer uses their crypto wallet to exchange US dollars for a crypto. The potential counterparty does the same in euros for the crypto. The crypto equivalents are exchanged and the payments are completed, but the crypto currency itself is still fluctuating in value. These fluctuations may be acceptable if you are sending €500 to your daughter studying in France, but they’re not acceptable for institutional trades of $25 million traded on razor thin spreads. The price risk is unacceptable.
9th Gear believes that it is tooling its infrastructure to be an early leader in this game-changing enterprise. The capital markets industry will eventually develop way(s) to move funds through fiat currency blockchain-based payments. If the payment can be exchanged through tokens/coins that are tied to the actual currency amounts that don’t fluctuate against the originating currency account, then blockchain technology is primed for direct payments between virtually any global financial institution. Remittance platforms with processes that act through a crypto will be immediately obsolete. In the meantime, 9th Gear is already ahead of the industry with its Gearinghouse™ product.