Beyond settlement risk mitigation for those CLS qualifying currencies there’s a world of exposure that remains in the FX market. Forwards, swaps and options, counterparties that currently rely on prime brokers for credit support and emerging market currencies – all these require reliance on credit judgement, tenors and collateralisation that can leave much to chance. These areas of risk are being addressed by a blockchain based platform called Assembly from New York based FinTech Symbiont. We spoke to the firm’s FICC Business Development and Strategy Lead Joe Ziccarelli, about its ground-breaking work to mitigate counterparty credit and intraday FX exposure
Could you explain how your technology and solutions address the problem of settlement risk in FX?
Our solution specifically addresses the risk that exists between trade date and settlement date. If there is a credit event, you are unlikely to ever reach settlement for those contracts, because you would have started some close out proceedings with the counterparty. So, the question is, how protected are you with your variation margin based on current market practice? We’re bringing a modern solution to the underlying systemic risk associated with variation margin processes that exist in the market today.
How have you been working with Vanguard and other market participants in the area of collateral management?
Vanguard selected the Symbiont technology after conducting extensive research and determining it was the best suited for minimising counterparty risk in this market with a decentralized application that would promote widespread adoptions while eliminating the need for intermediaries that add cost and expense.
While their initial use case focused on modernizing the variation margin process to reduce counterparty risk for their own investors, the greater goal is to improve the broader market structure by limiting this systemic risk and enabling new hedging structures to emerge for all.
Inside the Symbiont FICC network
Could you expand on how this technology ecosystem works for Vanguard and others?
FX market participants include asset managers, banks, broker dealers, corporates, all of whom benefit from reducing counterparty credit risk. Prior to engaging in normal trading activity, counterparties pre-agree the terms in the governing ISDA agreement and, importantly, the credit support annex. These define how collateral is to be calculated and moved. Symbiont’s Assembly platform programmatically reflects these terms in smart contracts, effectively assuming the role of calculation agent based on the inputs, timings, etc. agreed by the counterparties.
Valuations can then occur throughout the day; counterparties can see collateral movements intraday based on minimum threshold amounts. In this day and age, why would you wait on overnight batch processes, use a pad and pencil or Excel to solve a mathematical equation, when you could automate that with code that executes systemically with no human intervention? That’s what smart contracts do and what the Symbiont assembly platform provides.
Given the vast reach of the global foreign exchange market, what is your vision of what Symbiont’s technology can bring to the market as a whole?
Firstly, it is intended for the whole market: bank-to-client, bank-to-bank, whatever the market demands. Once you’re on the platform you can apply the same logic to reducing your counterparty credit exposure to everyone with whom you trade. It’s not limited, for instance, in the way that settlement risk mitigator CLS is limited to a defined set of currencies.
In fact, the more volatile or exotic the currencies, the greater the benefit our solution delivers, because that’s where you have the greatest intra-day mark-to-market moves, leading to the greatest intra-day counterparty credit risks. Although size of a portfolio is another huge factor regardless of the make-up of the underlying currencies.
Reducing systemic counterparty risk also enables participants to do more transactions at greater size within their established relationships, and opens the door to new relationships previously not considered, because of the increased frequency of the collateral movement reducing value-at-risk. This also extends to the current risks and delays attached to the return of collateral post settlement to the party that posted it.
Symbiont smart contracts manage the creation, execution and lifecycle management of OTC derivative agreements,
effectively mitigating risk for financial institutions that rely on FX and OTC derivatives to run their businesses
Lastly, time frames – how long do you think it will be before blockchain is the underpinning technology for the FX market?
What we’re building is common market infrastructure on a distributed ledger through the use of smart contracts that has been designed by market participants specifically for market participants. The distributed ledger acts as the common platform and single source of truth. Based on client readiness, our intent is to have production trades in the fourth quarter.
You will see a broadening of the activity and participants in 2021 because it’s simply a better, more automated and secure way to reduce risk through tighter collateral management that the market, industry groups and Regulators can easily get behind.