Imperium Markets CEO Stu Burns and chairman Rod Lewis. Photo: Rhett Wyman
Australian Financial Review – James Eyers Senior Reporter
Australia’s major banks are using a new financial market that will shift settlement of term deposits for institutional investors to real-time using similar blockchain technology that the ASX has failed to implement for the equity market.
Imperium Markets counts all the big banks among 40 financial institution customers who are exploring how to make the term deposit market more transparent for investors, including local governments and universities.
About $1 billion of deposits were placed on Imperium’s platform last month. It is a small amount of the overall market for wholesale term deposits and certificates of deposit estimated to be worth about $500 billion, which provides banks with a major source of funding.
Interest in the platform shows banks are considering innovating in a market that has traditionally lacked transparency. Deposit pricing is provided to big investors via phone calls and emails, and holdings are managed using spreadsheets.
“This is a key source of funding for the banks but a market that has been stuck in 1995 from a technology perspective,” Imperium Markets chief executive Stu Burns said. “We have built a venue where investors can send requests for quotes to multiple banks and get responses in ten minutes. It removes the manual processing.”
Imperium is working with the Digital Finance Co-operative Research Centre (DFCRC) to pilot distributed ledger technology, which will be provided by R3 Corda, including using digital currencies to create “atomic settlement”. This refers to products and payments moving simultaneously, rather than payment following the next day, or two days later under the “T+2” system for settling equities. The year-long pilot will commence in the first quarter of next year.
“Atomic settlement would create huge efficiencies and remove a lot of risk in our marketplace. We are trying to create a regulated network effect by creating real-time data that can create huge efficiencies for the banks,” said Mr Burns, who has worked for a decade at Westpac and Commonwealth Bank.
The company’s chairman, Rod Lewis, spent 17 years at Commonwealth Bank, including as head of trading. Before that, he worked at Credit Suisse for almost a decade as head of fixed income trading.
New structure emerges
Imperium received a tier 2 financial markets licence from ASIC in 2017, which allows it to create a market between banks and investors for deposits and bonds. There are plans to extend the platform into bond markets. Its software also allows investors to run compliance reports on their debt market investments.
It is the second example of a new market structure to emerge since the failure of the ASX’s blockchain project, and is seeking to apply similar technology.
FinClear, which has applied for a tier 2 financial market licence from ASIC, said last month it had already built and switched on a new blockchain-based system, which it called FCX, to create real-time settlement for investors in private companies.
Despite the meltdown of blockchain-powered cryptocurrencies this year, exacerbated by the collapse of FTX, and ASX’s decision to pull the plug on a blockchain system to settle and clear the equities market, research into the technology’s application in other financial market contexts is gathering pace.
DFCRC chief executive Andreas Furche said Imperium’s pilot would seek to demonstrate to the market and regulators “the improved liquidity, transparency and efficiency created when markets adopt digital assets”.
“We believe that the digital transition of regulated markets is inevitable,” he said. “It will lead to market-based solutions for large scale transactional processes that are still conducted inefficiently. The ability for digitised assets to be instantly exchanged and settled allows for transaction processing with no systemic or counterparty risks.”
DFCRC’s partnership with Imperium will fund academic researchers to produce a peer reviewed white paper on the pilot findings that will be published in financial journals.
The Reserve Bank of Australia and Digital Asset, which was building the ASX blockchain and has developed FinClear’s system, are among the funders of the DFCRC.
The pilot will explore writing deposit and bond coupon payments into “smart contracts”. It will also examine whether central bank digital currencies or stablecoins could accelerate intraday settlement.
“Digital coins are key here,” Mr Burns said. “If you can issue a digital coin to exchange for security, you are removing T+2, which is a problem in our market. T+0 means banks don’t need to reserve capital for settlement. It removes settlement risk and counterparty risk, and allows asset managers to allocate capital more quickly.”
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