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How Prime Brokers can use Blockchain to transform their Business Models

Authored by: Selwyn Halbertsma, Director - Consulting Practice, Business and Management Consultancy

Over the last decade, regulation has made prime brokerage a challenging industry with increasing expenses and lengthy processes related to securities lending and collateral management. In fact, distributed ledger technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-20 billion per annum by 2022, according to a paper by Santander InnoVentures. With the advent of new innovative technologies being applied within the financial services sector, like blockchain, prime brokers have a unique opportunity to transform the current business model and to offer more value-added services to their hedge fund clients. Blockchain can help most significantly in collateral management, real-time credit risk, and clearing and settlement.

Collateral and Margin Management
In collateral management, blockchain can be utilized for margin management and the collateral related to this. Today, there are challenges associated with meeting demands for collateral in a timely manner, with an estimated 15% of collateral currently left idle, leading to costs of approximately $4.5 billion a year. With OTC derivatives and margin payments being notoriously difficult to value and validate, and new regulatory requirements making this process even more challenging, the extensive manual processes in place today to source and move collateral have led to longer timelines, greater risk of error due to human intervention, and increased costs. By applying blockchain to this process, the risk of human error could be dissolved and the process would become quicker, leading to less costs overall. This would be possible through smart contracts, which would automate the extensive processes related to collateral, less disputes due to the intrinsically transparent and secure distributed ledger format that would validate all transactions, and manage a higher volume. For prime brokers, who are responsible for managing this service for a network of hedge fund clients, the ability to manage margin calls as a sort of utility for hedge fund clients, would be dramatically improved with blockchain.


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