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OCC Deal To Move $72 Billion In Equities To Axcore Blockchain

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The Options Clearing Corporation that helps BATS, Cboe, Nasdaq NDAQ and the New York Stock Exchange clear their equity derivatives is now in the process of moving its vast stock lending infrastructure to technology first popularized by bitcoin.

Through a deal signed with New York-based Axoni, the upgraded stock-lending platform, which now has $72 billion in equities on loan across the Americas, will see each participant in a deal run their own nodes on the Axcore blockhain, giving them direct access to the same pool of data in real-time, instead of having to rely on a series of time-consuming messages asking for and receiving data.

While not all this information will be visible to every party, moving the complicated stock lending process to Axcore, or any number of competing blockchains, could save the industry billions of dollars in auditing costs by giving each party the assurance that when they do need to access the data, it will be the same for anyone. One OCC executive says as many as three employees are required to manage the reconciliation process for every profit-generating trader.

The move, which is scheduled to be ready for clients in 2022, follows on the back of a previously unannounced proof of concept conducted by the OCC, one of the world’s largest equity derivatives clearing organizations, and shown to some of the largest financial institutions in the world, including Blackrock BLK , Charles Schwab, JP Morgan and Bank of America BAC .

But the true potential power of such a transition lies not in any single project in its own right, according to Greg Schvey, co-founder of Axoni, but in the synergies that could arise from so many previously isolated platforms running on the same technology. In January 2020 a new equity-swap platform backed by Goldman Sachs GS and Citi was launched, also powered by Axcore, and the Depository Trust and Clearing Corporation (DTCC) is in the final stages of moving its massive $11 trillion trade information warehouse to the same platform.

“What we're talking about here is another major piece of capital markets infrastructure, not just migrating over to blockchain generally, but running on the exact same platform as a number of other major asset classes and infrastructure providers,” says Schvey, who is also the CEO of venture-backed Axoni. “And as we project that forward, this is a huge step towards the end state of a globally connected web of perfect data synchronization.”

Regulated by both the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) the OCC runs an options, and futures clearing platform developed by Nasdaq, an internally-built risk management system and a data platform, and the stock lending platform being moved to the Axcore blockchain. First developed in 1993 to help the OCC act as a guarantor when a lender and a borrower agree to a security deal, the platform helps the OCC reduce risk if the borrower faces any unforeseen obstacles in repayment.

The project to upgrade that platform began in early 2019 with the proof-of-concept (POC) designed to show how using a shared, distributed ledger of transactions similar to bitcoin’s blockchain could reduce the need for auditors and accelerate settlement times. In the future, potential counterparties that viewed the POC, also including Morgan Stanley MS , State Street, Citibank, Credit Suisse and Société Générale, could run their own node, helping them co-create and access the shared ledger of transactions. Only the OCC will run the validator nodes that control governance of the system, and allow new counterparties to be admitted. 

Similar to Hyperledger Fabric, originally created in large part by IBM IBM and R3’s Corda, created by a consortium of financial institutions, this system is called a permissioned network. Unlike public blockchains such as bitcoin and ethereum that anyone can access, these networks are by invitation-only.

If successful, the project could reduce the need for the legions of auditors now employed to cross-check each counterparty’s records of a transaction, according to Matt Wolfe, OCC vice president of securities finance. “Our expectation is that by using a distributed ledger participants will be able to synchronize to that golden record in order to not have the prevalence of errors that they do have today, reduce the reconciliation costs and challenges and bring greater automation and efficiency to the process,” says Wolfe.

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