The Federal government this morning opened up the potential for competitors including Blockchain technology to disrupt the ASX Limited's (ASX: ASX) monopoly over the clearing of cash equities.
The government's reforms contain a quid pro quo for the ASX in that the bourse will now have more access to overseas capital, after its ownership limit was raised to 15% to match that of the banks like Commonwealth Bank of Australia (ASX: CBA). The ASX also announced it will cut its equities clearing fees by 10% from July 1 2016.
The Turnbull government is clearly alert to the potential of Blockchain technology and first flagged its deep commitment to tech disrupters back in December after announcing a proposed $1.1 billion investment in its 'Ideas Boom' reforms.
How could Blockchain disrupt the ASX and equities markets?
Blockchain technology has the potential to disrupt equities clearing and settlement processes as it could remove the need for reconciliations between equities clearing houses, brokers and other counterparties across every executed trade.
For example as it stands today cash settled trades will fail to settle for a variety of common reasons, including a buyer not sending the cash in time, sending insufficient cash, or sending cash in the wrong currency. Alternatively a seller may not hold sufficient securities to settle a trade. These kinds of issues are common across retail and institutional investors' trades on a daily basis.
Nowadays when a trade fails a reconciliation gap is created due to (largely) automated reconciliation systems between a cash equities clearing house and broker. The gap will flag the failed settlement and time-consuming corrective action will have to be implemented to close the reconciliation gap.
Blockchain proponents claim its technology could remove the need for the counterparties and systems required to effect daily reconciliations, settlement, and equities clearing processes.
The key being that under Blockchain the exchange of asset ownership can only be contained within the Blockchain and any reconciliation gaps over failed trades are effectively eliminated as a transaction is only processed in real time within the (failproof) Blockchain.
The advantage for investors is that they could expect to receive cash in their settlement accounts instantaneously after selling a parcel of shares.
However, the potentially transformative change for the equities-focused financial services industry is the elimination of failed trades or reconciliation gaps.
This could be a truly giant leap forward in improving the operational processes of brokers, fund managers, investment administrators and clearing houses like the ASX.
Foolish takeaway
No wonder the technophile Turnbull government is breaking down the barriers to equities clearing innovation and effectively encouraging the ASX's investment in helping develop Blockchain or distributed ledger technology. It clearly has the potential to transform a significant segment of the financial services industry for the better.
It also has the potential to save the financial services industry eye-watering amounts of money, so it's no surprise the large financial services players are wildly enthusiastic about the opportunities it presents. While ex-Goldman Sachs Australia head and now prime minister Malcolm Turnbull is also astonishingly keen on the possibilities of fintech.
Although, it's worth noting that many bombastic claims about new financial technology have been made before and Blockchain is a long way off from proving itself the real deal.
