Rosario, please tell us about what OTC Exchange Network (“OTCXN”) does?
OTCXN leverages its own proprietary Blockchain technology stack to operate a permissioned, peer-to-peer (P2P) electronic trading network solving some of the biggest problems facing all market participants; starting with the spot FX market.
The core value proposition is to democratize access to wholesale liquidity by eliminating the current credit gap with a purely technological solution that makes it possible for any trading entity to face any other trading entity directly, without counterparty risk, and without trusting OTCXN. We also support asymmetric trading relationships, where only one counterparty has a Prime Broker. For example, a non-bank market maker with a Tier-1 Prime Broker facing/pricing a retail broker, without a Prime Broker or Prime-of-Prime (PoP), that has collateral reserved for our network.
OTCXN’s total trade-to-settlement solution includes a suite of real-time services, such as collateral management, pretrade credit checks, liquidation risk management, counterparty risk and liquidity management, instantaneous clearing and settlement, and post-trade messaging including netting based on inbound messages for trades done away from the network.
Additionally, we provide a software gateway to banks at no charge that facilitates tokenization and reservation of collateral for members’ leveraged trading, such as cash in the client’s bank account, without OTCXN holding or controlling the collateral.
We also offer our enterprise-class Blockchain fabric as a stand-alone product. It was designed from the start with emphasis on performance, privacy, and security characteristics, to meet the needs of financial institutions and other industries in building global scale solutions.
What benefits does Blockchain bring to the table with respect to the FX market?
Our Blockchain provides an immutable cryptographic audit trail coupled with smart contract capability, multi-signature transactional support, stateless verification, need-to-know data privacy, and other Distributed Ledger Technologies (DLT), and as such, makes it possible to create new ways of transacting across trust boundaries. Besides the aforementioned benefits, one of the most powerful aspects of the technology is the integration of non-repudiation mechanisms that give rise to provenance authenticity, thus creating a provable value ledger. Putting this into plain English, imagine a marketplace where you keep collateral in your own bank account; your collateral is reserved for trading activities within the network. At any point in time, the existence of your collateral can be proven. Additionally, transactions are automatically and programmatically enforced based on the codified rules of engagement and include all necessary metadata as needed (such as FIX message activity). As transactions originate external to our system and are signed by necessary counterparties externally, it is possible to attest to the validity and ensure undeniable transactions. In short, a P2P trading network where you need not trust the network operator nor trust your counterparties, while not requiring credit, settlement, and other intermediaries.
What other key features does this new trading network deliver?
The platform is totally self-directed. Members can join the network, reserve collateral, set up all their trading preferences and face their counterparties directly, in a safe and secure way, all through the OTCXN web portal. In a future network version, our technology will make it possible for members to manage their counterparty risk and liquidity preferences in real-time. For example, it will be possible for orders to match only with specific geographical regions; counterparty types based on static data, such as whether they trade anonymously, or by name; and dynamic data and analytics, such as by credit rating and/or trailing leverage ratio over the last ‘n’ days.
How do the Tier-1 FX Prime Brokers fit into this new “best of all worlds” hybrid market model?
We provide Prime Brokers with tremendous value by opening a new market to grow their FX PB business with higher margins, without current limitations, and with lower risk. First, we provide, without charge, a set of tools that includes real-time trade matches with cryptographic guarantees and non-repudiation (i.e., inability for a counterparty to DK a trade), pre-trade credit controls, and kill switches.
This means for all clients they support (stake) with credit to trade on our network, they get 100% transparency and real-time matching. They still own the client relationship and charge fees as they see fit, but they are able to offload the heavy lifting related to the documentation, client counterparty onboarding and operational processes, as well as save the costs they currently pay to settlement intermediaries and trade messaging vendors.
How do other market participants fit into this trading network, does this open up any new markets?
One of the things I am most excited about is making it possible for anybody to provide liquidity, whether they trade on credit, collateral, or even in their own name and credit rating with an end-of-day net settlement delivery process. For example, there is no reason why Tier-2 and Tier- 3 banks, corporates, real-money asset managers and other creditworthy institutions couldn’t trade on or provide wholesale pricing without tying up capital and without being required to establish a Tier-1 Prime Brokerage relationship, which many can’t, or won’t do. Because each member of the network can choose how orders are matched, they can effectively control counterparty risk.
The same goes for the types of collateral that can be supported, starting with fiat currencies, but also stocks, bonds, gold, commodities, crypto-currencies, etc.
How are risk and costs reduced under this new market model?
By making it possible for any market participant to face a much more diverse set of counterparties, we believe that counterparty risk is less concentrated. Also, real-time clearing and settlement with finality reduces risks by greatly reducing open exposures. The way we facilitate reservation of collateral without taking custody or signatory control also drastically reduces client risk, especially relative to the brokerage market. The fact that any party with a balance sheet can become a collateral provider to other members and charge them a brokerage-like fee, means that risk will be less concentrated at the larger Tier-1 Prime Brokers and the larger PoPs.
Does your trading network support leverage or is trading fully collateralized; how are losses covered, are they mutualized?
We plan to start with 33:1 leverage, which is on par with Tier-1 Prime Broker credit lines, however, we believe that we can safely support even higher leverage due to the network operating as a comprehensive system that handles collateral management, pre-trade credit, and margining with auto-liquidation. We have a loss-reserve fund which we are seeding and contributing to from transaction fees received, and we are also working with large insurers to provide an insurance backstop facility for any losses above the reserve fund balance resulting from a theoretical debit balance on a member account. Losses and settlements owed are therefore, covered by the network and not mutualized or borne by the counterparty on the other side.
Does it change how market participants trade, i.e., the choice of liquidity aggregation platform, FIX protocol, etc.?
One of the great things about our trading network is that we only change how market participants face each other and as a result, broadening who they can face. The mechanics of trading does not change, it’s still FIX in and FIX out, over any technology stack the client is trading on today.
OTCXN handles all integrations with any FIX interface, without charge, to support its own pre-trade credit process. Platform vendors and ECNs can create pools for their clients that wish to face each other directly over OTCXN without changing the clients’ trading processes.
When can clients join OTCXN as members and start trading, and how is the network priced?
We are now engaging with clients of all types and organizing pilot trading to start in Q2 and Q3, 2017. Under our current plan, we won’t charge Prime Brokers or Market Makers for using our tools and providing liquidity, and we plan to charge a very modest per million access fee for most types of takers.