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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.

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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.

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.


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