As investment banks shrink the balance sheet available to buy-side firms that like to trade on credit, the need for an alternative has become urgent. To fill the gap, San Francisco-based Bosonic has adapted the tokenisation and atomic settlement techniques pioneered by the crypto-currency markets. By making settlement of each half of a trade conditional on the delivery of the other half, the need for intermediation by bank is eliminated. And tokenisation of securities in custody on to a blockchain network allows fully funded assets to be used as collateral for credit without leaving their custody account. Rosario Ingargiola, CEO of Bosonic, told Dominic Hobson how it all works.
Questions that are being asked
1. Currency trading, even by the new breed of “non-bank liquidity providers” such as Jump and XTX, is still heavily dependent on bank credit. What can the traditional FX markets learn from crypto-currency trading techniques and technologies?
2. At a Prime Brokerage webinar recently Tom Jessup of Fidelity described “atomic settlement” ss the “North Star” of Capital Markets. And in the BOSONIC model, currencies are exchanged “atomically” and settled in real-time, which dispenses with the need for credit intermediation because the exchange is synchronised and settled in real-time, meaning there is no need to rent a bank balance sheet. Does it not mean your account has always to be fully funded?
3. Presumably some counterparts will still need credit to fund their accounts, Where do they raise that from and how – presumably the credit has to be collateralised? If so, what do they collateralise it with, and how do they mobilise the collateral (i.e. move it from their account to the counterpart’s account, or pledge it by some other mechanism)?
4. Are there opportunities for traders to economise on collateral, by, for example, portfolio margining (reduced margin based on the possibility prices of different assets are uncorrelated), margin offsets (for offsetting long and short positions) or cross-margining (across different trading activities)?
5. The netting of trades between counterparties is one of the reasons the FX markets can trade such high volumes on such limited amounts of capital – most trades do not need funding (multi-lateral netting at CLS, for example, nets down $6 trillion a day to a hundredth of that ($60 billion)). How does your model preserve the benefits of netting?