The use of blockchain technology for clearing and settlement in the cash equities market could save banks around the world $6 billion a year, mainly through lower headcounts and back office IT costs, according to a Goldman Sachs report.
While the execution of cash equity trades has been streamlined over the years, the post-trade process remains complex and expensive and could benefit from the use of distributed ledger technology to eliminate duplicative confirmation steps, shrink the settlement cycle and cut risk, says Goldman in its 'Profiles in Innovation' report.
In the US alone, the new technology could lead to savings of up to $2 billion a year, partly by eliminating trading errors. Goldman estimates that about 10% of all trading volume currently ends up needing some expensive manual intervention but argues that this would be fixed if blockchain was used to enforce agreement at the time of entry.
The report says that big savings could also come from the streamlining of back/middle office activities through reduced headcount (up to $900 million) and fewer platforms and systems ($700 million), reflecting the reduction in trade errors and the elimination of manual reconciliation.
Meanwhile, while arguing that real-time settlement is unrealistic for some market participants, Goldman does think that using blockchain tech to cut the process from T+3 would reduce risk well as the amount of capital that broker/dealers commit to unsettled, outstanding trades.
Goldman says that, in general, blockchain will be a source of cost savings and efficiency improvement for capital markets, as opposed to a new competitive force capable of disrupting the position of incumbents’ profit pools. While clearing houses such as the DTCC and traditional custody models like JPMorgan and Citi could see revenue streams take a hit, this will likely be offset by cost savings.
Elsewhere in its report, Goldman predicts the blockchain tech could lead to global savings of between $3 billion and $5 billion a year in anti-money laundering compliance by boosting transparency and efficiency, with better data quality cutting the number of falsely identified 'suspicious' transactions.