The coronavirus pandemic has laid bare the risks posed to banks by reduced business activity and slower economic growth. Weaknesses in collateralized loan obligations are just one of the risks faced by lenders, along with negative interest rates and a volatile market in equities and commodities. Innovation, and specifically blockchain applications, can better manage these risks through a permissioned blockchain database that can track live deal flow. Through these technological features, blockchain applications can remove manual processes to ensure greater cost efficiency and risk management.
Regarding capital markets, the settlement process for deal transactions has been deprived of innovation. Here lies a key test case for blockchain adoption in financial markets — reducing risks and simplifying the processes of post-trade infrastructure.
The situation is most apt in fixed-income markets where newly issued corporate bonds typically feature a minimum two- to three-day settlement period, during which prices can fluctuate amid market volatility. This leaves all parties in the transaction exposed to greater credit risk. The situation is even more exacerbated in future foreign exchange contracts where volatility can be more pronounced.
By speeding up and automating the settlement process, blockchain technology can significantly save time and reduce the credit risk of transacting parties. Earlier this year, the Paxos Settlement Service, a blockchain-powered post-trade settlement platform for United States securities, made a significant breakthrough when it was announced that Credit Suisse and Société Générale had signed up to the platform — a bullish signal of what may be yet to come for blockchain technology in the capital markets.
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