e-Forex: How did Cobalt come into existence?
Andy Coyne: Cobalt was established two years ago as a start-up focused on post-trade FX. Co-founder Adrian Patten and I had both spent our careers in the FX industry and we noted a few important things that were going on at the time. The industry was increasingly challenged on a cost basis, mainly because of the impact of regulatory overheads and the increasing competitiveness and transparency that is required in execution. Increasing cost and falling revenue were driving the profitability of the industry downwards. Everyone was focused on cost, whether it came from processing, balance sheet or risk, and we spent some time looking at what the industry really spends on post-trade FX. We believe the collective number is roughly $20 billion, so the industry has a huge spend on something that firms don’t really compete on and is highly inefficient.
EF: In what ways is Cobalt taking a fresh approach to post-trade FX?
AC: Our launch coincided with a lot of noise around blockchain, so we spent some time looking at whether blockchain could address the issue and resolve the cost burden for our client base. There were elements of it that made sense and some things that didn’t make sense for a private marketplace like FX. We began the design with the aim of re-engineering post-trade FX. Our advantage was that by starting from scratch without the need to protect legacy infrastructure, we could do things in the right order. Our goal was to bring post-trade FX up to speed, because it has tended to lag in terms of technological capability for a marketplace that is so fast and liquid. We came up with a ledger-based technology stack that does things in a logical order and is much more efficient than the status quo. It is currently only for FX, because FX is our core competence and has a big enough set of problems to tackle. We want to make sure we deliver properly for FX before going cross-asset.
EF: How big is the Cobalt team?
AC: We have 11 employees and have built up the technology team this year as we move towards live production. Adrian Patten chairs the company and Devika Darbari is our chief operating officer. We’re a small company but that makes us nimble and focused – we’ve been able to move very rapidly from the design phase to testing, and we expect to go live in the first quarter of 2018.
EF: What is involved in joining the Cobalt network?
AC: We have designed it in such a way that allows market participants to migrate to the shared environment while legacy infrastructure continues to exist because there can’t be a big bang. Firms will migrate their flows on a relationship basis, so Cobalt can work alongside legacy systems while reducing the immediate costs and giving participants time to exit legacy infrastructure. The problem the FX market faces is that everyone essentially does the same thing but they do it with different systems and nomenclature, and what has been created over time has become very messy.
EF: How does Cobalt use distributed ledger technology (DLT)?
AC: The key priority for us is trade immutability, making sure that transactions are quickly and securely processed and cannot be subsequently altered by a third party. We have worked on this with the industry and will deliver it as part of the solution. There has been lots of experimentation with DLT but there isn’t yet a single network that any group of banks has completely agreed upon, so it is taking time for the industry to move to a common ledger infrastructure.
EF: What is Cobalt BlueSky and how does it fit into your offering?
AC: Cobalt BlueSky is our store of shared transactions and from that we run a series of post-trade services. We recognise that firms use other service providers that they want to grant access to the data, and clearly every party to the trade has its own data set that it may need others to access. Examples of third party services might include multilateral compression or transaction cost analysis (TCA), so BlueSky becomes the marketplace where a third party can provide services to ledger participants.
EF: What specific part of the FX trade lifecycle does Cobalt target?
AC: It’s the post-trade, pre- settlement processes. The pre-ledger environment will make sure the trade is good; it passes credit; it passes matching and a unique shared copy of the trade is created on which every party agrees. Once on the ledger, that’s a golden copy of the trade and then there are straightforward services such as aggregation and netting that can take place to maximise efficiency.
EF: How much interest has there been in Cobalt so far?
AC: I think we are suitably differentiated and the timing has been very good – the industry is ready for a change in post-trade FX. We have 22 banks and buy-side firms involved in beta testing the system and we plan to go live in the first quarter of 2018. Cobalt is open to all participants active in the FX market and its design is indifferent to the classification of market counterparties. Obviously the major banks are of significant interest because they account for so much of the flow and may bring their client base with them. We focused initially on the major banks, but we’re seeing a lot of interest from the buy side as well.
EF: What kind of cost savings might be gained by using Cobalt?
AC: There are several layers of cost and it’s important to understand the short term and longer term impact. In the short term there could be a significant difference in cost because we’re using very fast and well-proven technology. Every institution has its own unique cost base and it is our goal to simplify all of that. Depending on a firm’s size and complexity, it could spend up to $1 billion on post-trade FX, so there is a huge amount of expense that we think is unnecessary. We believe the market is ready to share the infrastructure because processing FX trades should be very straightforward but somehow the market has made it very complicated and costly. Now is the time to unbundle all of the layered systems and get back to how it should logically work through a shared infrastructure where everyone pays a fraction of the existing costs.
EF: What impact might blockchain technology have on the FX market?
AC: Having worked at a number of large institutions, we’ve seen how they operate and what potential showstoppers will slow things down. We’ve factored in the reality of legacy structures that will continue to exist as institutions unplug systems and take them out of commission. Awareness of how the market works has been key and we’ve factored that into the design of the infrastructure. As the industry coalesces around a common platform, they may bring further requirements to the table to solve other issues, such as clearing or regulatory reporting. There are many areas where banks will want greater efficiencies without having to build their own solutions, so I think we’re well set up to help the industry migrate to DLT.
EF: Why is Cobalt choosing to partner with other technology providers?
AC: Some of our partnerships are infrastructure related, so we are working with Solace and BT Radianz to enhance our data and connectivity capabilities. We have to operate to certain standards for a market of this size, so partnerships are key – we are working with LMRKTS and BestX to deliver compression and TCA services through our ledger. This creates a richer experience for our clients and a more powerful offering.
EF: What can we expect in the future from Cobalt?
AC: We have a lot of ideas around how to make the ledger infrastructure more valuable and we’re going to do that in collaboration with our membership, so adoption is key. The more adoption we can achieve, the greater the efficiency becomes. It’s a shared infrastructure so we have to build collaboration around it.