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Market Structure

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Today’s diverse markets can feel vast and complex. From developments in the voice, electronic and algorithmic execution landscape to the impact of regulation on liquidity, our Market Structure team can help you to cut through the noise.

Through monitoring, analyzing and commenting on the emergence of trends and the advancement of major initiatives across global markets, the team is able to provide you with insights and perspectives on the evolving marketplace.

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    Podcasts | Market Matters
FICC Market Structure: What’s Next for Electronic Trading?
7:12 It seems automation has seeped into many aspects of our daily lives – from the ways we communicate, to the ways we shop and travel – but how have financial markets embraced these efficiencies? Kate Finlayson, Global Head of FICC Market Structure sits down with Chi Nzelu, Global Head of Macro eTrading and Andreas Koukorinis, Global Head of Credit eTrading, on the drivers behind electronic trading across FX, Rates, Commodities and Credit.
Transcript

Kate Finlayson: Hi, I'm Kate Finlayson. I head up the FICC Market Structure team at JP Morgan. We focus on microstructural and regulatory dynamics, shaping how participants interact in the market. And so I'm delighted to share the mic today with my colleagues, Chi Nzelu Global Head of Macro e-Trading, and Andreas Koukorinis, Global Head of Credit e-Trading. Welcome both.

Chi Nzelu: Thanks, Kate.

Andreas Koukorinis: Great to be here.

Kate: So much of our lives now is automated, how we interface with technology. Whether that is how we watch movies or the one-click shopping we do, and the ease with which we can do these things and the products on offer, all influences which service providers we choose. What about financial markets, would the same apply? How do you see this developing? Chi?

Chi: Looking at the eCommerce examples you referenced, successful providers in that space offer a customer experience, which really becomes the key selling points of the product. There's a convenience factor at play here as well. In many cases, the end product hasn't really changed. So you're either watching a movie or buying a cushion, renting a place to stay for a holiday or getting a lift from A to B for example, but the ease in which you do that plays a large part to how you access the product.

The same is true for our clients in markets. It's just that in this case, the product might be a bond or swap. Of course, pricing remains a key factor for the clients, but the counterpart that allows you to trade with ease will likely be successful in the space. In our case, the ability to trade a wide range of instruments, for example, for an exchange to commodities base metals, US treasuries, with JP Morgan Markets mobile is a very good example of that convenience.

Kate: Andreas?

Andreas: Yes. Although you wouldn't generally buy a house over the internet, would you? If what you're buying is complicated and involves a large retransfer, then providing this efficiency can be actually quite difficult.

Kate: Of course, how you buy something depends, to a certain extent, on what you're buying. Looking at the market structure itself, there's clearly a difference between the macro world - FX and rates - versus credit.

Andreas: Completely. Just given the nature of credit markets, you have a multitude of bonds with different characteristics, like duration and rating. That's just single bonds. We're not even considering portfolio trades, ETF, index derivatives, and so on. There's a vast amount of data out there, and it may be harder to aggregate that data.

The question or key factor is how you capture or harness the data into and get insights out of it. Having the right tools or technology to do so is fundamental. Financial markets have evolved and technology in this aspect has advanced in our ability to interpret the data.

Kate: Right so which one of you has the harder job, then? Andreas has put a good case in there, Chi.

Chi: It's a good question. Across foreign exchange rates commodities, there's a fair amount of variety. For example, you have US treasuries, swaps in the base metal space. They all imply different things. Even within areas like government bonds, where you have a single issuer US treasuries, there's quite a difference between newly issued versus deep off-the-run securities.

Kate: One element of automation, which is dependent on the availability of data, is the use of algorithmic execution. So let's perhaps square away what exactly we mean by algorithmic execution. Chi, is this just something that provides you with a price?

Chi: In basic form, an algorithm is often thought of as a set of rules or instructions, which look to solve a problem or complete a task. Algorithmic trading, in our case, uses programmable instructions to take certain actions in response to market variables, such as time, price, volume. Algos are capable of processing market information and react to changes in market conditions very quickly.

Coming back to your first point about the customer experience. Algos also has this significantly, allowing clients to directly interact with markets and apply their own expertise in the process.

Kate: Chi, based on lessons we've learned in FX algos, approaching this more broadly, how do you think we could apply these to other asset classes? Or is it true that the deployment of Algos in various asset classes is holistically different?

Chi: We see use cases for clients' algorithms appear in certainly more liquid markets. The first step is around creating another workflow, where we can provide limit orders, which in itself can be considered an algo. Working to fill at an unspecified rate, for example. We have this already available in very liquid markets, like foreign exchange US treasuries.

At JP Morgan, we're building our infrastructure in such a way that we can leverage, for example, for an exchange algos in the rate space, and apply these algorithms on even less liquid instruments.

Sharing from what we've learned in the past through the development of algos for foreign exchange and equities, once the algo framework is complete, clients can then participate in that feedback loop to drive the direction of our development.

Kate: And what about algorithmic execution and credit and, Andreas?

Andreas: Look I tend to think of credit as the last frontier in terms of algorithmic trading. We were chatting previously about the heterogeneous nature of the bond market, the various venues and so on. While you have this complexity in the market structure, which requires specific navigation, as new technology develops, new capabilities come to the forefront together with the availability of the data. That's when things get exciting.

Systematic models are better able to make suggestions with a high degree of confidence because the ability to harness the data is more sophisticated and the data capture's actually more accurate. At JPMorgan, we spend quite a bit of time looking at how we can enhance the client experience, how we can better service the franchise. Part of that involves understanding how we can best consume the data, internalise the risks, and communicate better actionable prices to our clients in an expedient manner.

Kate: So essentially, it's about technological advancements and the ability to extrapolate value out of the data, both for ourselves and for our clients. And this is an ever changing space, which makes it an exciting spot to be in.

Thank you, Chi and Andreas, for your insights today. To our listeners, stay tuned for more episodes. Thanks for listening.

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    Podcasts | Market Matters
FICC Market Structure: Our Watch-list for 2022
13:15 The FICC Market Structure team outlines some of the topics front-and-center for the new year. Meridy Cleary sits down with Kate Finlayson and Barnaby Hodgkins to discuss a few of the team’s agenda items including digital asset regulation, the ongoing MiFID II review, the pick-up in portfolio trading and ESG ratings.
Transcript

Meridy: Hi, I'm Meridy Cleary, and welcome to Market Matters. I am part of the FICC Market Structure team here at J.P. Morgan. In today's episode, I'm joined by Kate Finlayson, global head of FICC Market Structure, and also Barnaby Hodgkins, who's an associate in the team. Welcome, guys. How are you both doing?

Kate: Doing well. Thanks, Meridy.

Barnaby: Yes, good. Good to be here.

Meridy: We know that 2021 has been another formative year in terms of market structure, like the continued opening of China's capital markets, proposed reforms to the US treasury market structure, and progress made in the transition away from LIBOR, just to name a few things. But seeing this year is almost up, I think it would be really great to have a discussion on some of the topics on our radar going into 2022.

In one of our previous episodes on Market Matters, the team looked at blockchain's market impact. Kate, it seems like there are a lot of moving parts in the digital asset space. Could you give us a bit of insight into the regulatory direction of travel there?

Kate: Sure. You're quite right in that there are many various components to the digital asset ecosystem. And this is a relatively short episode, so if I just touch on a couple. Our team are actively covering the evolving dynamics around distributed ledger technology and the power of shared ledgers and programmable assets. Along with its involvement in intraday term and overnight repo transactions, as well as securities issuance, we're seeing the application of blockchain technology in the broader financial market infrastructure.

More recently, the spotlight has fallen on digital currencies. And within that space, we've seen quite a bit of development and discussion around central bank digital currencies, otherwise known as CBDCs, where governments around the world have launched trials to explore the use of CBDCs to facilitate, amongst other things, cross-border settlements.

In July, J.P. Morgan's Onyx unit supported a simulated multiple CBDC experiment with the central banks of France and Singapore and over in the US, the Fed will be producing a much-anticipated report on new forms of digital money. And we're also looking out for a paper by the Boston Fed, which looks at the technical challenges that need to be addressed when building a CBDC, as part of a multi-year research project with MIT. So we're clearly seeing a variety of live initiatives.

Meridy: And there's also been a lot of focus in the US around stablecoins recently.

Kate: Right. So, as it stands, there's not a widely accepted definition of these coins, but according to the Financial Stability Board, they're a crypto asset that aims to maintain a stable value based on an asset, like the US dollar or a basket of assets. And they're increasingly being used for payment purposes to facilitate crypto trading and also lending because they allow users to store funds without having to convert them to a fiat currency.

Meridy: Barnaby, we recently saw a report from the President's Working Group on the regulation of these stablecoins. What stood out to you in the report?

Barnaby: Thanks, Meridy. Yes, so as you say, in a report released in November, the President's Working Group on Financial Markets recommended that Congress act promptly to ensure that payment stablecoins are better regulated and subject to a federal framework. In the absence of congressional action, the report calls on the Financial Stability Oversight Council to consider the steps available to bring some of these activities in to scope. But for us, two things in the report really stood out.

Firstly, the proposal for payment stablecoin issuers to become insured depository institutions, ie, banks. Secondly, it states that legislation should require stablecoin issuers to comply with activities restrictions that limit their affiliation with commercial entities.

What is also interesting is the extent to which certain digital assets, including stablecoins used for payments, fall under the purview of the SEC or the CFTC. The President's Working Group argues that depending on the circumstances, a stablecoin may constitute a security, commodity, or even a derivative. So depending on how this shapes up, we could perhaps start see US federal agencies put their rulemaking power to work sooner rather than later.

Kate: Yes and while the scope of this report is limited to stablecoins, it is clear that the Biden administration and many of these US federal agencies will continue to focus on legislation that brings more of this activity under the regulatory microscope. In a similar tone to the US federal agencies, the Bank of England said in a report published in June this year, titled New Forms of Digital Money, that payment stablecoins would be expected to face the same regulatory standards as those attached to bank deposits, but broadened the options considered for their regulation to include, for example, high-quality liquid asset requirements.

And in the EU, in a recent speech by Fabio Panetta of the ECB, he stated that the rapid stablecoin developments warrant careful monitoring as the risks could become a vehicle for money laundering and even terrorist financing. So we certainly expect more action on this topic in 2022, including developments to tackle some of the open questions that, Barnaby, you spoke to.

Meridy: Moving on to a second global topic, the ongoing MiFid II review has put a growing focus on key market structure themes, such as the algorithm trading, the trading venue parameter, and reworking post-trade transparency. We've just seen the European Commission release its MiFIR proposal, which could have a significant impact in the new year, since it includes the creation of a consolidated tape. Barnaby, this has obviously been a long time coming, but how significant is this proposal to post-trade transparency?

Barnaby: Absolutely, Meridy. Yes a long time coming and also, as you say, something we've been monitoring for years. The report we saw from the European Commission introduces the framework for a consolidated tape, whereby ESMA has to appoint a single provider per asset class. Whilst in the US, you've got TRACE, this is clearly a sign ificant development for Europe.

The creation of a tape stems from the fact that the current post-trade information under MiFID II, is arguably somewhat fragmented and a little difficult for investors to access. The Commission wants to ensure all market participants have a holistic view of the market, as they believe this will foster a single EU capital market and encourage further retail participation.

While we welcome proposals for the creation of a consolidated tape, we also feel it's critical to ensure that the post-trade transparency regime that couples it, is well calibrated to ensure it does not adversely impact market liquidity. For example, the extent to which illiquid bonds or large transactions are required to disclose their price and size in a real-time manner. This could really materially impact pricing and liquidity in these instruments.

Another question that also tends to come up is the potential for regulatory divergence between the UK and the EU as these rules start to get revisited. I think it's going to be really intriguing to see how the two jurisdictions mirror or diverge one another across any number of regulatory topics next year.

Meridy: And also in the context of the MiFID II review, we've seen a growing number of regulators placing more attention on the scope of the trading venue perimeter, and the types of activities or systems that could be encompassed here. Kate, we recently saw this reach the US so do you anticipate this being a priority in the new year?

Kate: Yes. As you said, Meridy, the ongoing MiFID II review shone a light on the trading venue perimeter. ESMA's final report on the organised trading facility regime came out in April, which looked at what activity would be considered multilateral, and therefore need to register as a trading venue. The report specifically mentioned technology providers such as EMS and OMS solutions. So this could have a potentially broad-reaching impact, especially given how our clients are increasingly looking to utilize some of these technology providers, for example, to aggregate direct streams.

And we've seen this topic move from the agendas of regulators in Europe to those in the UK and now the US. In September, the CFTC's Division of Market Oversight issued an advisory letter to essentially clarify and remind market participants of the activities that could trigger the requirement to register as a SEF. And included within this letter was the view that any trading technology that facilitated trading or execution of swaps through one to many or bilateral communications could still be considered multilateral.

Meridy: And Kate, just to touch on a topic that's been a big source of pushback from the industry, the mandatory buy-in regime under the CSDR. In a tweet on November 24th, Mairead McGuinness, Commissioner for European Financial Services, confirmed that the Council and Parliament had agreed to make changes to the CSDR to allow for the postponement of the mandatory buy-ins in the rule. You see, sometimes it's okay to be scrolling on Twitter during work hours!

Kate: I suppose so. Well, this has been something that's been front and center for some time now, given the negative impact on liquidity in corporate credits, EM, and repo markets. There's still a lot to be ironed out here despite the move to allow for this postponement, and how long the delay could last for is still up for discussion. Of course, the mandatory buy-in regime is just one, albeit significant element. The rest of the Settlement Discipline Regime is due to go ahead in February 2022, which includes the cash penalties framework and actually quite a bit of setup required for that.

Meridy: So definitely not end of story there. And you mentioned credit. In our Q3 global report of this year, we set out reasons for the rapid takeoff of portfolio trading. Barnaby, what will continue to drive its popularity?

Barnaby: Exactly, Meridy. So as you discussed, we're seeing the use of portfolio trading more than ever before, as clients across the globe continue to realise the execution and price efficiencies that it offers. We anticipate the market's prominence to only continue into 2022. While every client's motivation for using portfolio trading may be unique, we have started to note some common use cases emerging. For example, the ability to now process complex cross-currency, cross-asset, bidirectional trades, or the emergence of market-making services in proxy baskets, for example, J.P. Morgan beta1, and, of course, the use of portfolio trading to optimise your portfolios and achieve bespoke investment objectives.

And on that last point, it's very interesting to us that alongside the growing demand for sustainable investing, users are now able to construct ESG-friendly baskets to meet their targets. As investors adjust their portfolios to new regulations that have been emerging, like SFDR introduced earlier this year, portfolio trading through these proxy baskets or optimisation, as previously mentioned, presents an efficient tool to help facilitate these trends.

Meridy: So we've covered a few topics today that no doubt will be top of our list going into 2022, but these are just a sample of the broad range of themes on our radar. Kate, is there anything else we've seen shape how clients trade and interact with liquidity in the market?

Kate: Meridy, as you say, we covered a broad range of topics on a global basis. If I had to pick just two more, something that has been rolling out the past few years is the uncleared margin requirements, with the final phase coming up in September 2022. Phase 6 is the big one, as it encompasses the most counterparties impacted so far. This is where we could see market participants adapt and potentially change their trading behaviour or the products or instruments they would like to trade in order to meet the requirements.

And then, of course, there's ESG. We all know this has become a larger part of financial markets, particularly in the last few years, as investors increasingly want to prioritise investments that have a sustainable component. And from our side, we've seen regulators pay more attention to disclosures, reporting requirements, and ESG ratings. So we anticipate an increasing amount of products and trading techniques coming to the fore there.

Meridy: Well, thank you both so much for a great discussion on these evolving themes. With 2021 quickly coming to a close, I expect another active year in the market structure space. And to our listeners, stay tuned for more episodes of Market Matters, and please reach out to your sales representative if you'd like to receive any of our reports. I hope you have a great day.

Disclaimer The views expressed in this podcast may not necessarily reflect the views of J.P. Morgan Chase & Co, and its affiliates, together J.P. Morgan, and do not constitute research or recommendation advice or an offer or a solicitation to buy or sell any security or financial instrument. Referenced products and services in this podcast may not be suitable for you, and may not be available in all jurisdictions. J.P. Morgan may make markets and trade as principal in securities and other asset classes and financial products that may have been discussed. The FICC market structure publications, or to one, newsletters, mentioned in this podcast are available for J.P. C clients. Please contact your J.P. Morgan sales representative should you wish to receive these. For additional disclaimers and regulatory disclosures, please visit www.jpmorgan.com/disclosures.

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    Podcasts | Market Matters
FICC Market Structure: Breaking Down Derivatives Clearing Trends
10:25 What are some of the drivers behind potential shifts in derivatives clearing activity? This question continues to be top of mind for many buy-side clients. Kate Finlayson sits down with Emma Richardson and Paul Davidson from the Market Structure team to discuss themes that could shape derivatives clearing in 2022 and beyond, including the uncleared margin requirements, post-Brexit dynamics and sustainable finance.
Transcript

Kate Finlayson: Hi. I'm Kate Finlayson and welcome to Market Matters. I'm Global Head of FICC Market Structure at J.P. Morgan and in our team, we're focused on drivers impacting the provision of liquidity in the market and how one interacts with that liquidity. In today's episode, I'm joined by Emma Richardson, Global Head of Treasury, Business Risk and Product Development for the derivatives clearing business, as well as Paul Davidson, North America Head of Derivatives Clearing. Hi Emma and Paul.

Emma Richardson: Hi, Kate.

Paul Davidson: Hello, Kate. Great to be here.

Kate: As we head into the new year, phase 6 of the BCBS/IOSCO's global uncleared margin requirements will apply from 1st September 2022. As this final phase in the rollout of the requirement approaches and the threshold load, a much larger number of market participants will be affected and are no doubt assessing what these requirements will mean for their portfolios in terms of the potential associated trading costs and how best to prepare.

Now, margin economics aside, it's not necessarily a clear-cut decision in terms of where liquidity may actually lie where bilateral trading still remains the best or possibly the only source of liquidity or way of hedging certain asset classes and what derivatives clearing solutions are available. Paul and Emma, are we seeing clearing activity increasing as a result of the UMR phase-in? What impact will this have in terms of the offerings put forward by clearing houses? Perhaps Paul, if I come to you first.

Paul: Sure, Kate. Well, clients have been actively seeking opportunities to achieve both margin and capital efficiencies over the last couple of years and we continue to see voluntary clearing being adopted in instances where the clear model makes fiduciary sense. In terms of the recent phase of UMR though, I would say that it is still too early to say how it could change behavior as it relates to clearing.

It's hard to confirm the exact number of impacted parties in each phase but ISDA estimates about 300 in phase 5. And a lot of the impacted parties will still be managing below that $50 million IM threshold perspective activity potentially under documentation forbearance and therefore they won't be required to set up a custodian account or post-IM in line with the uncleared margin rules until they finally reach that threshold.

Emma: Yes - I'd agree. I do think it's a little bit too early to say. One of the things that we've noticed is that although the mandatory clearing obligation hasn't significantly changed over the last few years, clearing houses have continued to evolve their product offering.

So, for example, products like inflation swaps or credit derivative options are now available for clearing. One of the other product developments we've seen is an advancement in cross-margin opportunities. And all of these things together mean that voluntary clearing is an attractive solution for clients irrespective of the implementation of UMR.

We also hear a lot of interest for FX clearing but the range of products eligible for clearing is much smaller and therefore clients might end up bifurcating their portfolios, which would mean that they might lose both netting and margin efficiencies. The industry is working, though, on expanding that scope of products that are eligible for client clearing and that could make that more attractive as an option for clients in the future.

So, it will be interesting to see how this evolves over the course of the next 12 to 24 months. Paul said, for phase 5, it was estimated around 300 counterparties. For phase 6, it could be north of 700 additional parties that are going to be brought in to scope for initial margin. So based on the track record, I do think it will be another few years until we really understand the impact of the initial margin rules.

Kate: One element that we continue to keep our eye on are the liquidity dynamics post-Brexit. In September 2020, the European Commission granted temporary equivalence to the three London-based CCPs which expires at the end of June next year. This is of course particularly interesting in terms of how balances may shift over the longer term and how policymakers and regulators view things.

While it has been announced by Commissioner McGuinness on the 10th of November that she plans to propose that the European Commission extends temporary equivalence for UK CCPs, the commission has continued to express its desire to reduce EU market participants' over-reliance on UK CCPs and to increase clearing capacity in the EU. What are the factors that are driving the decisions made by market participants about where to clear?

Emma: Look, I think that was a really welcomed announcement that we just had, although it just still does remain unclear how long any extension will potentially be for and it's definitely an area that continues to get a lot of attention as all market participants await clarity on the outcome of the process. As you said, Kate, though, the EU authorities have been very clear. They have a strong desire to see EU entities reduce exposure to UK CCPs, particularly for Euro-denominated derivatives. There's been a very active dialogue with market participants on both the UK and the EU regulators actively engaging on any barriers to that happening.

I think, irrespective of what role you play in the market, so either as a dealer or as a client, there are some core considerations that you would take into account, such as cost, netting efficiencies and liquidity, as you think about whether you put on new trades or whether or not you switch your existing ones. One of the things that has become really clear from all of the market dialogue is that there is no one-size-fits-all solution.

What we touched on in terms of the impact of the UMR rules, I would say that the same thing happens here where counterparties are very focused on the funding and initial margin requirements, really as key considerations in terms of that decision-making.

So market participants need to consider things like cross-currency offsets and product offsets that they currently get within their portfolio, as they make those decisions around where to roost new or potentially migrate legacy trades.

There's also just some very practical considerations just in terms of how to physically port positions from one CCP to another, both in terms of the operational and also from a cost perspective.

Kate: Okay. That's interesting. Paul, how are you seeing US clients prepare for the potential split in liquidity pool? Do you see an increased interest from US customers in onshore clearinghouses, and do you foresee a potential impact to LCH liquidity if this goes ahead?

Paul: Well, we're certainly seeing an increased interest from US asset managers on the topics of CCP equivalents and the potential impact on Euro liquidity pools. A priority for them will be establishing access to European CCPs under the FCM model, and while both LCH, SA and Eurex have FCM models, the take-up has been relatively slow to date, but we do expect that interest will increase as the regulatory landscape becomes clear.

Kate: Well, moving onto a topic that's an increasing part of mainstream financial markets, sustainable finance, Paul, from a clearing perspective, how are CCPs adapting to client demand in this space and helping facilitate the use of ESG products?

Paul: Well, you're right, Kate. There's been a growing number of ESG products available and we can generally put these into three categories, those are equity indices, carbon products, and commodity products. First off, with equity indices, they're available with an ESG screening that either removes the bottom performers in sectors that are not deemed ESG or by focusing on the top performers within the standard index. Then with regard to carbon products, those provide an ESG component by pricing carbon in the first place, which would help market participants hedge and then ultimately reduce their pollution costs.

Then finally, there's a growing number of commodity products that would support the transition to a low carbon economy. A couple of examples would be renewable energy, fuels futures, and futures even on things like scrap metal and recycled content. The bottom line is the increase in sustainability offerings across product categories is certainly an indication of the important role CCPs play in the industry's ESG efforts.

Kate: Yes, and from a market structure perspective, we are seeing continued action from global regulators on climate roadmaps and a push for harmonized frameworks, disclosures, and reporting. The regulatory direction of travel could potentially lead to even more ESG product offerings, but also help to prevent greenwashing.

So these issues are clearly front and center for a lot of by-side market participants. This has been in what I view a very helpful and enriching discussion. Emma and Paul, thank you very much for joining me and for your insights today.

Emma: Thanks for having us Kate.

Paul: Thanks Kate.

Kate: And to our listeners, stay tuned for more episodes of Market Matters. Thanks for listening.

Disclaimer The views expressed in this podcast may not necessarily reflect the views of J.P. Morgan Chase & Co, and its affiliates, together J.P. Morgan, and do not constitute research or recommendation advice or an offer or a solicitation to buy or sell any security or financial instrument, are not issued by Research but are a solicitation under CFTC Rule 1.71. Referenced products and services in this podcast may not be suitable for you, and may not be available in all jurisdictions. J.P. Morgan may make markets and trade as principal in securities and other asset classes and financial products that may have been discussed. The FICC market structure publications, or to one, newsletters, mentioned in this podcast are available for J.P. Morgan clients. Please contact your J.P. Morgan sales representative should you wish to receive these. For additional disclaimers and regulatory disclosures, please visit www.jpmorgan.com/disclosures.

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    Podcasts | Market Matters
FICC Market Structure: Blockchain’s Market Impact
10:14 Kate Finlayson, Global Head of FICC Market Structure, has a conversation with Scott Lucas, Head of Markets DLT, and Tyrone Lobban, Head of Blockchain Launch, Onyx, to discuss how blockchain technology has the potential to transform financial markets through innovation and new product opportunities.
Transcript

Kate Finlayson

Hi, I’m Kate Finlayson and welcome to Market Matters. I run the FICC Market Structure team here at JPMorgan and today it is my absolute pleasure to be joined by Scott Lucas, the firm’s Head of DLT for Markets, and Tyrone Lobban, who is the Head of Blockchain Launch as part of JPMorgan’s Onyx unit. Welcome both!

Tyrone Lobban

Thanks, Kate.

Scott Lucas

Very nice to be here.

Kate Finlayson

Scott, Tyrone, as you know, my team is focused on the new and changing ways our clients interact and access liquidity as the market structure evolves. I think there's no denying that Distributed Ledger Technology or DLT holds phenomenal potential to improve the reliability and efficiencies in financial markets. On a basic level, we know that DLT refers to the technological infrastructure that allows a decentralized database across multiple nodes. Blockchain technology is just one type of DLT allowing transactions to be recorded on a shared immutable ledger. This term is thrown around a lot, but what does blockchain actually mean in the context of financial markets?

Tyrone Lobban

One way to think about blockchain is as a shared programmable infrastructure, and what that actually means is, you can have multiple parties using the same platform to record and view information, and also standardise and undertake different processes together on that same platform. All of us knowing that everyone is seeing exactly the same information and reaching the same outputs and outcomes.

One of the key uses of the shared infrastructure is the ability to tokenise assets, which essentially means using smart contracts to represent assets on a blockchain and embed directly in those assets key information like who the owner is, how the asset should be treated in different scenarios and under what conditions that asset should be transferred. This is actually hugely impactful because, doing those things today takes multiple teams across multiple parties. Now, of course, blockchain is also the underlying technology that has enabled the creation of cryptocurrencies like Bitcoin and Ether, but there really is much more to blockchain than just those cryptocurrencies, and you'll probably be surprised as to how long it's actually been around.

Kate Finlayson

Right. It's not new technology. Have we seen the use of it shift though, and how we engage with this evolving space?

Tyrone Lobban

Yes, just using JPMorgan as an example, we've been experimenting with blockchain since about 2015 when we had just a handful of product managers and engineers, and through that experimentation, we actually ended up creating a blockchain platform called Quorum, which is a fork of the public Ethereum blockchain, but with enterprise features added in, like stronger privacy, higher performance, the ability to permission who joins the network.

In the US since, blockchain has actually proven to surface opportunities that show how it can be integrated into the wider financial infrastructure. For example, we are seeing central banks look to build multicurrency payment solutions. We actually worked with the monetary authority of Singapore on an effort called Project Ubin, which really was set up to explore how blockchain can facilitate interbank settlements. This has now graduated to a fully commercial joint venture that is actually looking to deliver that solution for Singapore.

We've also seen how blockchain can be used for payment. We actually launched a product called JPMorgan Coin. This is a blockchain-based payments rail and account ledger for JPM's wholesale clients, and is actually essentially a blockchain-based bank account.

Now, this is interesting because it enables us to do things like DVP settlement for our securities-related projects. I think the overall shift has been away from early stage research and development into something that could actually rearrange the underlying market structure. Clearly we're seeing the potential of blockchain to become that mainstream tool. One of the things that we've actually done is create a business unit called Onyx, which focuses exclusively on scaling, industrialising and commercializing blockchain applications. So we're well beyond the R&D phase.

Kate Finlayson

Scott, as Tyrone just mentioned, the firm's work with this technology is longstanding, but we're now starting to see the fruits of this labour with live tradeable products being used by our clients every day. You're focused on the DLT product within JPMorgan's markets division. How is this technology infiltrating day to day trading in repo markets, for example?

Scott Lucas

As mentioned by Tyrone, we've benefited from a range of those R&D efforts over the last few years, and have really zeroed in on some areas we think have actual value. We started with a specific issue that we felt was both achievable to solve and has positive economic and risk outcomes to the clients, and that's intraday-liquidity.

Today, intraday-liquidity provision is often via unsecured, uncommitted credit provided by the clearing bank. By providing that liquidity in a secured way, it reduces risk and provides liquidity from another source. Had we tried to update all the risks, reporting, settlement, order systems, et cetera to make this happen, it just wouldn't have happened. DLT, we saw the capability to do this and extend that further as the technology embeds itself in the wider market infrastructure.

So today we can do intraday trades in the US in traditional products such as repo, and by the end of the year, we're able to trade intraday overnight in turn in the US, UK and Europe using a wider set of eligible collateral and adding other tri-party agents. Today we use BoNY. We'll also be adding JPMorgan into the flow.

Kate Finlayson

And clearly, there's a real benefit for JPMorgan clients.

Scott Lucas

Yes. There is. This won't mean the repo market suddenly will flip to DLT trades on mass. However, the timing specificity of the settlement, the fact that there's no way of failing a trade and the longer operating hours does mean there are additional trades that clients can do that they can't do today. That's the sort of impact we expect the technology to have across a range of markets and asset classes. Widening the opportunity set, allowing clients to execute trades they want to do today but they can't because of settlement limitations.

Kate Finlayson

And Tyrone, how exactly are we at JPMorgan achieving this? What does this workflow look like?

Tyrone Lobban

Well, the crux of it is that we are leveraging smart contracts to tokenized assets. Actually, on the one hand, we're tokenizing repo collateral, like US treasury is held at a custodian, but also soon to be other types of assets. On the other hand, we're tokenizing cash throughout JPMorgan Coin product. Now with both tokenized cash and tokenized collateral now operating on the same platform, the same ledger, we can programmatically exchange those two things simultaneously based on different conditions. So as soon as the trade settles, the borrower receives their cash, and the lender has the rights to the collateral.

And upon maturity, say three hours after the trade was booked, the reverse automatically happens. This is all without repo, middle office or back office processing. I think this really shows the power of shared ledgers and programmable assets. And actually, the way that we achieve this at JPMorgan is by developing a bank grade platform called Onyx Digital Assets. This is a multi-asset platform specifically targeted at tokenization. When I say, "Bank grade," I mean that it has met the rigours of JPMorgan's cybersecurity processes. It complies with applicable regulatory requirements for repo transactions.

All participants have to have gone through JPMorgan's KYC processes, and we've built a robust rule book for participants to sign up to. The repo app is just the first app on top of this new platform. We are already building new apps in other areas with other clients.

Kate Finlayson

Well, it feels like the technology and workflows involved are actively addressing some inherent market structure challenges. Looking to the future, Scott and Tyrone, what more can be done? What other markets are prime for innovation with this technology?

Scott Lucas

There's a lot of investment out there by firms in the FX and the securities issuance space, which suggest the market sees opportunities there. Again, driven off settlement, efficiency and certainty. There's no quick click of the switch, the market's heavily regulated. The existing reporting and transparency requirements are substantial, and the investment to replicate that will be significant. So u se cases need to be real, economically viable and have an extensive [unintelligible] growth. That being said, there is a lot of investment out there and a substantial investment in those spaces.

Tyrone Lobban

Yes and I think further out, we're certainly keeping a very close eye on DeFi or decentralized finance because, once again, this shows the power of smart contracts that can hold and facilitate the movement of assets in a trusted way without counterparty risk. Ultimately, I think what we'll see is the creation of new asset classes, new derivatives and new ways for parties to trade and settle with each other.

Kate Finlayson

Absolutely. In essence, the technology presents a vast array of opportunities in terms of introducing execution efficiencies and some great progress made already. Thanks Scott and Tyrone for a really interesting discussion today, and to our listeners, stay tuned for more episodes of Market Matters. Thanks for listening.

Voice Over

The views expressed in this podcast may not necessarily reflect the views of JPMorgan Chase & Co, and its affiliates, together JPMorgan, and do not constitute research or recommendation advice or an offer or a solicitation to buy or sell any security or financial instrument. Referenced products and services in this podcast may not be suitable for you, and may not be available in all jurisdictions. J.P. Morgan may make markets and trade as principal in securities and other asset classes and financial products that may have been discussed. The FICC market structure publications, or to one, newsletters, mentioned in this podcast are available for J.P. Morgan clients. Please contact your J.P. Morgan sales representative should you wish to receive these. For additional disclaimers and regulatory disclosures, please visit jpmorgan.com/disclosures.

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Kate Finlayson Quote As FICC markets continue to evolve, our global Market Structure team provides key insights into regulatory initiatives, execution trends and macro developments, enabling our clients to better prepare for current and future drivers of change. Kate Finlayson FICC Market Structure J.P. Morgan