JPMorgan is using blockchain to drive efficiency in the repo market; Goldman and others are taking notice.
Goldman Sachs is reportedly one of several financial institutions to sign on to JPMorgan’s custom blockchain service — a sign that more broker-dealers were looking to take advantage of digital currencies for their repo operations.
In an interview with Bloomberg, Scott Lucas, head of blockchain markets at JPMorgan, said the investment bank is already using blockchain to conduct billions of dollars worth of repurchase agreements. The bank utilizes JPM Coin, a dollar-backed stablecoin, to swap digitized U.S. Treasury bonds much more efficiently.
As Bloomberg notes, JPMorgan conducted the first live trades internally utilizing its Onyx blockchain infrastructure.
That was enough to catch the attention of Wall Street rival Goldman Sachs, which will reportedly sign on to Onyx for repo trades early next year.
Lucas said, “We’re at the point where we can offer this product to our customers,” adding that other banks and broker-dealers are also expected to join the service.
“It’s a question of gradually increasing risk appetite if you want market participants to put real money on the table […] Then the next step will go further and the next step will go further.”
Christine Moy, who runs Onyx, said blockchain enables the repo market to be measured in “minutes and hours” as opposed to “overnight or within days.”
Goldman also runs a digital asset unit led by Matthew McDermott. He described JPMorgan’s repo-market service as proof that “enterprise blockchain can address a real-world problem in the financial system…”
Repo agreements are short-term lending arrangements for dealers in government bonds. In the case of overnight repo – a market that’s worth trillions – dealers sell government bonds to investors and buy them back the next day at a slightly higher price. That higher price reflects the interest rate.
The repo market is often considered to be the plumbing of the financial system because it facilitates cash and securities flow among banks. It allows financial institutions with large securities positions to borrow cheaply from cash-rich parties in exchange for a small return. Because securities, such as U.S. Treasury bonds, are posted as collateral, the transactions are considered low-risk.
The repo market went haywire in Sept 2019 after overnight rates skyrocketed to four times the Federal Reserve’s benchmark rate, prompting “emergency” intervention from the central bank to avoid a cash crunch. The repo operations continued well into 2020, raising concerns about liquidity shortages and contagion in the financial markets.