As fixed-income markets evolve and become more electronified, many believe distributed ledger technology could play a major role in its transformation. Emma Lovett, executive director for DLT markets at JP Morgan, discusses why she thinks the bond markets are ripe for distributed ledger technology and where she sees this tech being applied to remove operational risks and inefficiencies, not only in settlement but right across the front-to-back office.
In this episode, Lovett also addresses the challenges of getting buy-in from senior managers to invest in the tech due to its association with the crypto markets but as education around the tech evolves, she says so will the appetite for DLT applications.
Finally, the JP Morgan executive director, unpacks what are the next steps for DLT in fixed-income markets and what needs to happen to drive wholesale acceptance and adoption.
Transcript Interview
Jo Gallagher Welcome to Trader TV your insight into institutional trading. There are substantial risk and operational costs when it comes to managing OTC markets. Here to discuss how distributed ledger technology is helping or seeking to resolve some of those challenges is Emma Lovett at JP Morgan. Emma, welcome to the show.
Emma Lovett Thanks, Jo.
Jo Gallagher So how can DLT be applied to existing bond markets?
Emma Lovett So what we’ve seen in the bond markets is it feels like it’s almost like a Goldilocks asset class for starting the evolution of blockchain technology. We believe that that is because of the operational efficiencies that DLT can bring to the financial markets. With something like an equities asset class that already runs pretty efficiently. Loans could really benefit, but I think there’s a longer path to get there. Whereas with bonds, it feels like it’s a natural asset class to start the journey. We’ve seen a coalescence. There’s been around 40 digital new bond issuances since the end of 2021, and it really feels like it’s starting to develop in that space. When you think about some of the advantages that DLT can bring, if you compare, say, for example, a failed trade in the existing bond markets today, what happens is there’s a series of investigations by various operation and settlement teams to try and establish why that trade failed. And often that’s by emails, by phones to try and work out what’s gone wrong. If you think about how you can use distributed ledger technology and all the market participants on that one trade can access the same ledger, then you can instantly see why that trade failed. And you don’t then have to do that reconciliation between ledgers and work out what happened. All of that just falls away.
Jo Gallagher And why use DLT compared to traditional technologies?
Emma Lovett I think we’re just moving towards even in our everyday life, just quicker, faster, more modern technologies. Even when you think about bond coupons, they’re currently paid either semiannually or annually because you literally used to have to tear off a strip, send it in, and then in return you’d receive a cheque as your coupon payment. If you can use the technology where all of that can be embedded, it can be straight through processed, then you can start to really change the way that bonds are traded. Why not have a daily coupon or even have your coupon that is calculated to the second? You know, these are quite some exciting changes that we’re hoping we’ll start to see as we see wider scale adoption of DLT technology.
Jo Gallagher What are some of the roadblocks you’ve seen in using DLT fixed income.
Emma Lovett For a long time? We needed to separate out the association of Blockchain Technology, or DLT, with crypto. We’re not talking about crypto here. It’s more around the underlying blockchain technology. We need to separate that discussion. Then also, you know, I think we have to be frank around the risk appetite that both the supervisors have and our own internal institutions have around investing in this type of technology. And from an operational level, when we start thinking about how we can do delivery versus payment, trade, settlement, we just don’t really see enough digital cash options at the moment. I think over time we’ll start to see more. But I think that has been one of the reasons why perhaps we haven’t seen adoption at a greater rate.
Jo Gallagher And so now what’s next for DLT fixed income?
Emma Lovett I think we’ll see more and more use of DLT. I think we’ll see use cases that both concentrate on operational efficiencies and more front end use cases. As there’s more adoption, more market participants start to use it, it will be clearer how there are potentially new revenue streams. But I think the key is that we have a sense of collaboration before competition in order to sort of really grow the ecosystem together. And then I think, you know, it will take time, but we really will see some changes within the bull markets.
Jo Gallagher I’d like to thank Emma for her insight and of course you for watching. To catch your other shows, including Trader TV this week at 6.45 UK time go to Tradertv.net.
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