The latest news defined as a debacle in the financial world the Archegos case, which has caused great turmoil and large losses to renowned banks. The protagonists, in this case, have been Archegos and mainly two investment banks, Credit Suisse and Nomura, which have suffered multi-billion dollar losses (between $3bn and $4bn each) after a fire sale of about $20 billion of Chinese and US stocks as their client, Archegos Capital Management, was forced into a huge unwinding of positions. Nomura and Credit Suisse were providing prime brokerage services to the hedge fund founded by Bill Hwang, who once worked for Tiger Management, and after building great exposure to stocks, Archegos’ was hit hard by declines which triggered several margin calls and demand of cash from other banks. The capital management’s main strategy was long-short equity, that is to be indifferent to the direction of the overall market by betting that the share prices of some stocks will rise while that of others will fall, hoping the long term will have a greater return with respect to the short, however, when markets are volatile the strategy can come unstuck, which is what has happened to Archegos Capital Management.
Worth of notice in this debacle is one of the first transactions in the equities world involving the blockchain system: Credit Suisse cut some US equities trades with the Nomura-owned broker Instinet using the blockchain technology.[1] Traditionally this transaction is a two-day process involving America’s Depository Trust and Clearing Corporation (DTCC), the industry-owned utility that normally settles stock trades, however, Credit Suisse and Instinet have instead dealt directly with each other by recording the shares on a shared digital ledger and handled by Parox Trust Company, a specialist in cryptocurrencies technology and custody services. This transaction is “one in a kind” as it only took place as the Securities and Exchange Commission (SEC) granted a temporary “no action” letter, which defined the innovation as tolerated but not formally approved. Paxos is intending to apply for a permanent SEC license in order to compete with the DTCC, even though it is unclear if the SEC will agree or not. If the settlement process will embrace definitely the blockchain system it may have a wide range of implications, as regulators have granted the DTCC an effective monopoly for four decades in order to ensure the trade does not fall apart and undermine the confidence in the markets.
The exercise occurred on the 7th of April, at 11 am Eastern Time (ET), and was settled ad 4:30 pm ET, a same-day settlement cycle known as T+0.[2] If granted a clearing agency registration, Paxos hopes to provide a more flexible execution of settlements, ranging from T+2 and T+0, and hopes to save participants around 70% on transaction fees. Greg Lee, Paxos Managing director, said: “We have been in dialogue with pretty much all of the top 20 clearing brokers in the U.S. […] we know that a lot of things that people want, the market is either not ready for yet or it's going to take time to achieve but we're trying to make sure that they see that we're making the investment for all those things they want in the future”. Indeed, also the DTCC has recognized the need for faster transactions, however, it must be noticed that the move would require a complete overhaul on multiple levels, and the last shift from T+3 to T+2 took 14 years, even if this could take less time and come much sooner, as also Mike Bodson, DTCC President and CEO, wrote: “We continue to explore opportunities to further optimize the system, including finalizing a prototype of a T+0 digital settlement platform using distributed ledger technology (DLT) and other emerging technologies […] DLT continues to pose exciting possibilities for the industry, but applying it to the world’s most liquid cash equity market may be an overreach at this point.”
This deal has the power to emphasize that there is more to blockchain than the renowned cryptocurrencies such as Bitcoin that are based on this technology and have gathered large momentum in the past year, reaching a market capitalization of $2 trillion for the first time in April 2021. As stated by the head of digital assets markets at Credit Suisse: “Innovation in blockchain technology is incremental. We’re excited to make progress in forging a path to faster settlement times at lower costs in public equities”.[3] The former will probably be the first of a large number of transactions involving the use of blockchain technology in the equities market, and there is already an estimate of other 4,000 different financial assets and processes operating on blockchain technology.
[1] Tett Gillian, Blockchain may change equities trading for good, Financial Times, https://www.ft.com/content/9e38bee8-d70a-4f28-a771-c3d77068e9ba , 2021 [2] Bambysheva Nina, Same-Day Stock Settlements Are Here: Using Paxos Blockchain, Credit Suisse And Nomura Instinet Hit T + Zero, Forbes, https://www.forbes.com/sites/ninabambysheva/2021/04/06/same-day-stock-settlements-are-here-using-paxos-blockchain-credit-suisse-and-nomura-instinet-hit-t--zero/?sh=285aec2a3802 , 2021 [3] Parsons Joe, Credit Suisse and Instinet use blockchain to settle US equities trades on same day with Paxos, The Trade, https://www.thetradenews.com/credit-suisse-and-instinet-use-blockchain-to-settle-us-equities-trades-on-same-day-with-paxos/ , 2021
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