Vanguard and blockchain provider Symbiont are one step closer to integrating blockchain technology into foreign-exchange (FX) forwards processes across a network of a dozen banks, brokerages and asset managers.

After two years of collaborating on a blockchain application to digitize and automate the FX forwards and contract process, the two companies are slated to enter production with a larger group of market players as early as the third quarter, said Symbiont CEO Mark Smith. Already in the early testing network are Bank of New York Mellon, State Street and Franklin Templeton.

The product addresses the post-trade process of moving collateral for FX contracts between various counterparties, a historically difficult process due to the differing margin calculations and the time it takes to move collateral, Smith said. Symbiont is a fintech specializing in blockchain technology — a distributed ledger technology that underpins cryptocurrencies like bitcoin — for financial markets, and works with Citi and Nasdaq, among others.

With the blockchain product, counterparties publish their records on the FX contracts to the database, wherein Symbiont uses its proprietary tool, Sympl, to standardize the margin calculation and automate the movement of collateral.

The goal is to have a more standardized and frequent margin calculation so market players can use their collateral more efficiently, because they will have more up-to-date information, thus mitigating the tendency to overcollateralize, Smith said.

“The real challenge in the market right now is that collateral only moves every couple of days and so your exposure can change much more quickly than the collateral will move, and if one of the other counterparties fails, there’s a very high risk that whatever collateral was posted is a couple days old and might not be adequate,” said Warren Pennington, principal and head of Vanguard’s investment management fintech strategies group. Valley Forge, Pa.-based Vanguard manages $5.9 trillion in global assets and offers more than 425 funds to more than 30 million investors worldwide.

Vanguard hedges hundreds of billions of dollars of currencies every month and has typically used a largely manual process to negotiate the FX forward contracts, like much of the rest of the industry, Pennington said. “Right now, there’s no electronification of that market,” he said, adding that the negotiation of each trade is usually done via phone, with manual steps involved to record and agree to the contract. With blockchain, that record keeping is digitized and the calculation, typically a “disjointed” process, is standardized, he said.

“If you’re trading hundreds of billions of dollars of currency contracts, and you think about if the value of those can fluctuate 1% or 2% on a high day, that’s the exposure. And if we can cut down that exposure, that’s the potential savings,” Pennington said.

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Before the companies can enter production, Symbiont will need to build out its network of participants. “From a marketplace standpoint, the most difficult thing to do is to create liquidity, so to have enough counterparties to participate,” Smith said, adding there’s “north of a dozen” counterparties in the pipeline for API integration.

Vanguard, for its part, has been working with Symbiont on multiple blockchain initiatives, including one in pilot for digitizing ABS issuances and another, in use since February 2019, for data management of its index funds. As the investment firm doubles down on its blockchain usage, Pennington said he is optimistic about the simplicity it brings to Vanguard’s internal systems.

“One of the reasons why we took the currency hedging opportunity was because it was such a big opportunity for us; if we could improve the way the markets work, we could get better trades and hopefully pass on those costs to the funds. But there isn’t really an infrastructure or a legacy system — there’s a lot of pieces that we’ve had to pull together ourselves and many of those are built internally, and this is just so much simpler,” Pennington said.

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