Blockchain Could Disrupt Global Securities Value Chain: Morgan Stanley

By Value Walk

With the securities industry experimenting with blockchain across the post-trade market, Morgan Stanley analysts anticipate that blockchain presents a threat / opportunity to the $77 billion post-trade market. Daniel P. Toohey and team point out in their June 2 research piece titled “Global Insight: Blockchain- Is ASX set to shape a brave new world?” that within the equities value chain, central securities depositories (CSDs) seem best placed to drive innovation as they maintain a record of ownership.

ASX is pioneering a blockchain proof of concept

Toohey and colleagues point out that though the securities industry is experimenting with the ledger across the post-trade market, within equities, the most progressed is the ASX-planned replacement of the CSD with a blockchain solution.


They point out that ASX is pioneering its blockchain proof of concept with a “go or no go” decision to be made by mid-2017.

ASX timeline

The analysts note that the success or otherwise of the ASX demands the attention of investors globally as blockchain has the potential to re-shape the business model.

ASX-First mover

The MS analysts note that whilst it is too early to materially affect their investment case today, if the ASX’s proof-of-concept works and is implemented, valuations may be affected sooner than expected. To evaluate the relative risk and opportunity from the  ledger for stocks in their coverage universe, the analysts applied four screens:

Evaluating global exchanges

Potential adoption across post-trade infrastructure

Toohey and team draw reference to a recent report titled “Global Insight: Blockchain in Banking: Disruptive Threat or Tool” from their EMEA and U.S. financial analysts, Huw van Steenis and Betsy Graseck, wherein some of the misconceptions and hurdles to implementation for the  ledger have been highlighted:Hurdles to blockchain adoption

The MS analysts reason that out of the entire lifecycle of a trade, blockchain adoption presents good potential across post-trade infrastructure.

Trade lifecycle

Highlighting how blockchain would operate in registration and settlement, the MS analysts point out that in a blockchain, the shared ledger would be maintained and updated by each node, removing the need to rely on a central body. However, to settle a transaction, each node will independently verify the new transaction and update the ledger accordingly. The MS analysts point out that this is not done through a debit/credit-stylebook entry; rather, each new transaction is “chained” to the prior transaction, such that the full history of ownership is visible.

Blockchain-an example

The following table captures some key intermediaries in global post-trade:

Key intermediaries

Focusing on the impact on some of the post-trade intermediaries, the analysts note that custodians represent $40 billion of the revenue pool and are the linchpin in securities services. The MS analysts point out that the bundled pricing and breadth of services offered by custodians will make it hard for new tech or adjacent service providers to attack the custodians. They note that custodians are making both defensive and offensive investments in blockchain. They make defensive investments to reduce the risk that a new third-party IT service provider comes up, while they make offensive investments by delivering clients more functionality cheaper before competitors, new entrants or adjacent firms do.

Custodian-revenue breakup

Touching upon the pace of adoption of blockchain by various countries, the MS analysts note that the world will move at different speeds, with adoption likely to be influenced by market structure, maturity and strategic options for growth/ consolidation. They believe the chances of early adoption in Hong Kong are lower than they are for Singapore and Australia, where growth and relevance are greater risks.

First appeared at Value Walk