Chile stock exchange, IBM trial blockchain solution for securities lending

Wednesday, May 17, 2017

Chile's Santiago exchange stock market announced a partnership with IBM on Wednesday to implement what it says will be the world's first blockchain system for securities lending.

The project, which has been more than a year in the making, is intended to help Latin America's third largest stock market increase the size of the short selling market and eventually scale the system to other countries.

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Blockchain works as an immutable ledger that records transactions. The new solution is designed to help reduce errors, possible fraud and processing time for each transaction, while also improving transaction management and lowering costs.

Santiago exchange's CIO Andrés Araya explained that with blockchain the exchange will be automating the complex back office processes of clearing and settlement after trading, of signing contracts, adding the assets and other services for intermediaries to create collateral.

The project will involve creating a private blockchain network for the exchange of this information, which can be viewed by banks, regulators and all other parties involved.

"The objective is to make the process more transparent. The regulator will be able to enter and view the collateral of the pension funds. We will simplify what today is a bureaucratic process," Araya told BNamericas.

The executive said that short selling currently represents just 0.7% of the total transaction volume, which is US$200mn daily. The idea is to aim for a figure closer to 40%, which is the case in some developed nations.

Araya believes that with the guarantees and lower operational costs resulting from the blockchain system, this will expand the scope of shareholders prepared to lend their shares for trading, beyond what today are predominantly pension funds.

"We want to increase the slice of the pie and feel that this technology can help us achieve that aim," Araya said.

Santiago exchange CIO Andrés Araya and IBM Chile CEO Francisco Thiermann (Credit: IBM)


Last year a team from the Santiago exchange traveled to IBM's New York offices to thrash out real use cases to see how blockchain technology could help solve business pain points and it was decided that the short selling system for securities lending was the best place to start.

The idea is to run the blockchain-based system in parallel with the existing system over the coming months to evaluate performance before migrating the process entirely next year.

The solution developed by IBM is based on the open source Linux Foundation's Hyperledger Fabric, with the intention of ensuring the solution is available to support multiple parties across the financial industry ecosystem.

"It's important that the system is open so that it can be used by more than one institution," IBM Chile's general manager, Francisco Thiermann, told BNamericas.

"Santiago exchange is a pioneer in its industry, and the blockchain adoption establishes a transformational precedent in the financial market, not just in Chile but in this region and the world," he said.

According to Araya, the initial experiment with blockchain will be to demonstrate to the local market what can be achieved with this technology and its potential for scale.

"Our bigger project is to create a peer-to-peer network amongst private financial institutions outside Chile, managed by us, which will improve the flow of trade of shares," Araya said.

The idea is to leverage Latin America's integrated market, known as MILA, which brings together the bourses of Chile, Peru, Colombia and Mexico and is designed to give investors a greater supply of securities, issuers and also sources of funding.