Chile
03 October 2017
Francisco Thiermann of IBM says the imminent launch of Chile’s securities lending blockchain solution will provide a shot in the arm for the market
Image: Shutterstock
How did this project begin and how well developed is it now?
The Santiago Exchange and IBM have been working together for around 20 years, and the exchange itself has a very well developed IT team working on various projects. A year ago the exchange approached IBM to discuss the potential of using emerging technologies such as blockchain in order to improve the facilities for its clients.
At the end of 2016, the exchange had developed its understanding of the technology and was able to prioritise some best-use scenarios. In January the securities lending application was selected as the one to begin with.
Once the securities lending application is live, the exchange will expand this service into other service areas and is planning to link with other Latin American markets.
The infrastructure for this project was completed in mid-May and now, just as with any blockchain solution, we are bringing in new members and agencies to work within the network. In Chile, this means the institutional investors, which are predominantly private pension funds.
Once the final processes are in place the system is expected to go live by the beginning of 2018. The completed system will be a first-of-its-kind solution for the securities lending industry and will bring all sorts of opportunities for the Chilean market.
How does the pensions industry operate in Chile?
Chile moved all its public pensions funds into private funds 35 years ago. There are now roughly 10 different funds in the market and these are the main asset holders in the country. Between Chile’s pension funds and the brokers, the exchange can capture a large part of the financial strength of the market.
What are the benefits of this solution for the securities lending market in Chile?
The main benefits are significant improvement in transparency for the whole system and a major reduction in transaction and reporting costs. The nature of a blockchain solution means regulators can access transaction data first hand and this should also bring down reporting costs for market participants.
In terms of transaction costs, currently, a large percentage of securities lending and short selling transactions are done manually. It requires a lot of resources to complete a trade and that has hampered overall transaction volumes in the market. Only the most lucrative transactions are worth doing because of all the paperwork.
Once the blockchain system is in place, market participants will have the opportunity to automate a lot of the low-value transactions, which should improve total volumes on the exchange.
How will it work, and how will it sit in Chile’s financial infrastructure?
All the technical complexity of accessing the solution will be managed between IBM and the stock exchange itself. For the pension funds and brokers, there will be no need to engage in implementing the system, as the interface will be laid upon their existing systems.
There are several market participants working on blockchain solutions for securities lending but none are as far advanced as this. How did IBM and the Santiago Exchange get so far ahead?
In terms of why Chile is first, I have to say it’s the knowledge and the willingness of participants in the local market to innovate that makes all the difference. For the exchange, it’s a chance grab a lucrative business opportunity that will not only help its clients but also offers a valuable asset for the future.
At the same time, the close relationship between IBM and the Chilean exchange has played a major role in making this project a success. The fact that IBM is active in the IT sector, but also in the business consultancy sector, means that we had all the tools to get this project completed.
There are a lot of people with the technology who are unable to convince the decision makers of a business to move forward, and also a lot of business leaders that don’t understand the technology but want to get involved. At IBM we have both, and here in Chile we found a home for this solution.
What’s next for IBM and the Santiago Exchange in terms of utilising this technology across Latin America?
There are several other Latin American markets that could benefit hugely from access to a blockchain solution, specifically, Mexico, Colombia and Peru. There is an agreement between the stock exchanges of these markets known as Mercado Integrado Latinoamericano, or MILA, that could allow these exchanges to share technological advances such as this. For IBM this is a big achievement and we look forward to expanding into these markets as well.
The Santiago Exchange and IBM have been working together for around 20 years, and the exchange itself has a very well developed IT team working on various projects. A year ago the exchange approached IBM to discuss the potential of using emerging technologies such as blockchain in order to improve the facilities for its clients.
At the end of 2016, the exchange had developed its understanding of the technology and was able to prioritise some best-use scenarios. In January the securities lending application was selected as the one to begin with.
Once the securities lending application is live, the exchange will expand this service into other service areas and is planning to link with other Latin American markets.
The infrastructure for this project was completed in mid-May and now, just as with any blockchain solution, we are bringing in new members and agencies to work within the network. In Chile, this means the institutional investors, which are predominantly private pension funds.
Once the final processes are in place the system is expected to go live by the beginning of 2018. The completed system will be a first-of-its-kind solution for the securities lending industry and will bring all sorts of opportunities for the Chilean market.
How does the pensions industry operate in Chile?
Chile moved all its public pensions funds into private funds 35 years ago. There are now roughly 10 different funds in the market and these are the main asset holders in the country. Between Chile’s pension funds and the brokers, the exchange can capture a large part of the financial strength of the market.
What are the benefits of this solution for the securities lending market in Chile?
The main benefits are significant improvement in transparency for the whole system and a major reduction in transaction and reporting costs. The nature of a blockchain solution means regulators can access transaction data first hand and this should also bring down reporting costs for market participants.
In terms of transaction costs, currently, a large percentage of securities lending and short selling transactions are done manually. It requires a lot of resources to complete a trade and that has hampered overall transaction volumes in the market. Only the most lucrative transactions are worth doing because of all the paperwork.
Once the blockchain system is in place, market participants will have the opportunity to automate a lot of the low-value transactions, which should improve total volumes on the exchange.
How will it work, and how will it sit in Chile’s financial infrastructure?
All the technical complexity of accessing the solution will be managed between IBM and the stock exchange itself. For the pension funds and brokers, there will be no need to engage in implementing the system, as the interface will be laid upon their existing systems.
There are several market participants working on blockchain solutions for securities lending but none are as far advanced as this. How did IBM and the Santiago Exchange get so far ahead?
In terms of why Chile is first, I have to say it’s the knowledge and the willingness of participants in the local market to innovate that makes all the difference. For the exchange, it’s a chance grab a lucrative business opportunity that will not only help its clients but also offers a valuable asset for the future.
At the same time, the close relationship between IBM and the Chilean exchange has played a major role in making this project a success. The fact that IBM is active in the IT sector, but also in the business consultancy sector, means that we had all the tools to get this project completed.
There are a lot of people with the technology who are unable to convince the decision makers of a business to move forward, and also a lot of business leaders that don’t understand the technology but want to get involved. At IBM we have both, and here in Chile we found a home for this solution.
What’s next for IBM and the Santiago Exchange in terms of utilising this technology across Latin America?
There are several other Latin American markets that could benefit hugely from access to a blockchain solution, specifically, Mexico, Colombia and Peru. There is an agreement between the stock exchanges of these markets known as Mercado Integrado Latinoamericano, or MILA, that could allow these exchanges to share technological advances such as this. For IBM this is a big achievement and we look forward to expanding into these markets as well.
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