OSTTRA sees tokenisation fuelling efforts to develop post-trade efficiency

Speaking to FOW last week, Rowcliffe said tokenised assets could help modernise derivatives post-trade infrastructure, but the pace of adoption remains uncertain and will depend on interoperability with existing financial market systems.

“I think they definitely have a role to play. How quickly that is adopted is more of an open question,” Rowcliffe told FOW in an interview. “I think fundamental to the success of that is interoperability between a digital world and digital versions of financial instruments or collateral and established standard infrastructure.”

Rowcliffe said expecting financial markets to shift entirely from established infrastructure to separate digital systems was unrealistic.

He added: “An expectation that we're just going to build a completely discrete digital world and have everyone lift from traditional infrastructure to new, I don't think that is a realistic expectation. So interoperability between traditional and digital infrastructures will be important for the success of that longer term.”

The comments follow BNP Paribas joining OSTTRA’s consortium of strategic bank investors in August, alongside Bank of America, Barclays, Citi, HSBC, Wells Fargo and UBS Investment Bank. KKR remains the post-trade infrastructure provider's majority owner.

Rowcliffe said the seven banks will help OSTTRA steer product development and identify problems that could benefit from an industry-wide solution.

“There is no immediate specific ask, but we have both the evolution of the existing set of services which we provide, plus a whole series of newer initiatives which we have been working on for a while,” he said.

“That group of banks we meet with regularly, and the intent is to have them both help us steer existing product development as well as identifying pain points to solve in the future.”

Rowcliffe said having major dealers as shareholders also provides a forum for greater consistency across post-trade workflows.

“I think ultimately everybody is driving towards the highest possible quality underlying data, such that there is a single source of truth that can be used in multiple ways to solve multiple post-trade issues and problems, and that's certainly what we're continuing to drive towards at OSTTRA.”

Tokenisation and continuous markets

The push towards tokenised assets comes as markets increasingly consider longer trading hours and faster settlement, although Rowcliffe said traditional post-trade infrastructure has some distance to travel before supporting continuous markets.

“For the regulated and traditional markets, there's still a long way to go in achieving more timely processing and timely settlement to be able to achieve 24/7 trading,” he said.

“It is obviously the direction of travel, but I think the market has still got a long way to go on some of the more basic components. And again, it will come back to underlying data quality and moving towards a single source of truth in order to empower faster, more accurate, more timely processing and settlement.”

Collateral optimisation is another area of focus for OSTTRA as settlement cycles shorten and firms seek more efficient use of capital.

“Collateral optimisation has taken on an increased priority in the marketplace as we move towards ever reducing settlement times and greater efficiency in capital usage,” Rowcliffe said.

“OptimisingOptimizing how collateral is used is a key component of that. So yes, it is definitely a focus area for OSTTRA.”

Rowcliffe identified settlement and processing times as constraints on the movement of collateral, pointing to intraday repo as one area where shorter processes and better data could improve efficiency.

“Settlement and processing timelines make moving collateral time constrained. So, improving that would be a major advantage in optimising for the marketplace as a whole.”

“People talk about intraday repo, for example. Shortening both the process and improving the data which supports the analysis and the process, is fundamental to that shift as well.”

Efficiency gaps remain across asset classes

The level of post-trade automation varies significantly between asset classes, with Rowcliffe contrasting established OTC swaps workflows with less automated repo and government bond markets.

“Some asset classes are arguably a number of years behind others in terms of their sophistication or adoption of standardised and market-wide workflows,” he said.

“On the one hand, you've got the OTC swaps world at the front end of efficiency, and then at the other end, you've got some of the more traditional repo or government bond markets where processing is much more fragmented and less automated.”

OSTTRA is also exploring artificial intelligence as a way to improve post-trade processes, including reconciliation, although Rowcliffe said its effectiveness depends on the quality of underlying data.

“We're certainly seeing increased efficiency and improved reconciliation from the use of AI, but it will again come back to the point I've made a few times around that underlying data quality, which is a prerequisite for AI to be effective as a more automated part of the process,” he said. "You have to first have certainty of data accuracy underlying the situation. So, without that move towards a single source of truth, using AI to automate processes is more difficult and error prone.

“Something that certainly OSTTRA is very focused on is finding routes to achieve that, and I think we're fairly confident that we're in a good position to help that happen,” Rowcliffe said.

US relief widens optimisation opportunity

OSTTRA is also looking to capitalise on recent US regulatory relief for post-trade risk reduction services, covering activities including portfolio compression, rebalancing and basis risk mitigation.

“What that relief allows us to do is improve the efficiency of the solutions that we already provide by allowing us to include previously out of scope instruments in order to solve those optimisation problems more efficiently,” Rowcliffe said. “We can now utilise more standardised instruments, and that means that our solution is available to a wider audience who are comfortable trading in those less exotic trade types.

“We can widen the pool of participants in the multi-participant networks that we run in order to solve those industry problems, which increases the efficiency of outcomes for both existing and new participants.”

Looking longer term, Rowcliffe said OSTTRA already operates as a cross-asset, cross-product post-trade provider rather than seeking to build a single architecture across every market.

“We see the world moving towards a post-trade operating system - we are already very well placed to deliver that operating system - and we'll continue to evolve and grow that approach to drive post-trade efficiency," he said.