Editor’s note: Kelly Mathieson is the Chief Business Development Officer at Digital Asset. This is Part IX in our post-trade transformation blog series. Don't miss the Introduction, Part I, Part II, Part III, Part IV, Part V, Part VI, Part VII, and Part VIII.
Data is the common denominator of business, especially so given digitization and expansion of assets, financial services, and solutions.
Yet sourcing, managing, maintaining, and appropriately sharing data creates enormous inefficiencies and challenges that drive up cost and risk for everyone involved. Nowhere is this more evident than in post-trade, where customer, counterparty, and transaction data needs to cross institutional, market, and geographic boundaries quickly and with high levels of accuracy. Adding to the complexity, data must be managed in a way that preserves all required privacy and must also adhere to any specific regulatory requirements about where it is physically held or stored.
Although data is critical to managing the relationships of trust that underpin all financial transactions, the current state of play is far from ideal.
-
Onboarding can take from six weeks to many months, with senior salespeople spending an average of 1.5 days per week onboarding new client organizations. This costs providers in terms of staffing and productivity, and prohibits investors from acting on their investment strategies.
-
Inconsistent, untimely, or incomplete data increases risk, from fraud or market risk to counterparty or settlement risk. Multiple documents are required and may differ from provider to provider, country to country, or by transaction type. The lack of ‘golden source’ records accessible to each party in the trade necessitates constant reconciliation of security, pricing, and market data at every step of the transaction lifecycle.
-
Compliance and regulatory reporting remains a slow, manual, and error-prone process that generally takes place after the fact. This limits timely oversight that could stop small problems from becoming big issues, particularly during emerging market crises.
Reimagining data management has the potential to create a healthier, more efficient financial ecosystem.
Transcending traditional data boundaries
Markets, financial institutions, and their clients have been trying to tackle the data management challenge for decades. The initiatives have been extensive and often resulted in important progress. For example, banks have created internal reference data engines to streamline transaction processing and improve accuracy; markets have worked to standardize requirements and documentation; and institutions have created repositories of core documents to accelerate onboarding. For the most part, however, any improvements were only realized within the walls of that particular organization or market.
Distributed ledger technology, particularly the use of smart contracts and multi-party workflows, can deliver broader, transformative change by removing traditional barriers and enabling more flexible access to data. The opportunities lie in a more centralized approach to information with permission-controlled access. The right data is provided at the right time to the right parties while ensuring appropriate safeguards remain firmly in place. Importantly, access is not restricted to parties only using a particular technology: different ledger solutions or legacy technologies can connect using interoperability protocols, which break down traditional information silos to create efficiencies throughout the transaction lifecycle.
Exploring a future state
For a glimpse into the future of post-trade, consider these three use cases:
1. Broader access to better data. Today, every player in the post-trade process separately ingests data and moves it through their own systems to populate different processes. Then, the transaction moves to the next step in the chain and the process begins all over again—but this time, the data received must be reconciled and/or re-populated, creating multiple layers of time-consuming double-checks.
Distributed ledger technology allows for a single system of record for market, pricing, NAV, and other data. Entitled parties have real-time access to the ledger and transaction data, improving accuracy, increasing reliability and confidence, and substantially reducing operational costs and risks. Aggregating and standardizing data across markets, entities, and jurisdictions can create even greater efficiencies.
Since smart contracts can preserve country-specific rules, requirements, and market practices and enforce them when conditions are met, the governance process also improves. Oversight can take place in real time: regulators and supervisors can look at or across markets or asset classes to conduct appropriate surveillance and analysis, without visibility into individual transactions in order to preserve privacy.
Harkening back to earlier blogs in this series, the introduction of digital-native assets or tokens can significantly streamline the reference data process. With asset and lifecycle data embedded in the asset, there’s no need to secure that information from external providers. With institutions using up to seven different feeds just to source and validate corporate action data, this can create substantial operational and financial efficiencies.
2. Shared, efficient workflows. It’s difficult to mutualize workflows without sharing sensitive or confidential data across entities. But stopping the flow of data at each institutional boundary means significant duplication of effort and results in inconsistent or inaccurate information, missed deadlines, and other risks. With a multi-party workflow managed by smart contracts, the data can retain integrity throughout the entire lifecycle. The difference lies in the ability to permission a party to view or use specific data at different points of a transaction, with access on a strict ‘need to know’ basis. So while there may be an entire universe of data available, some parties may have access to a galaxy of data while others only see data from a particular solar system or planet—and that access will vary by role or at different points of the transaction.
Across post-trade, it would be difficult to overstate the metamorphosis created by multi-party workflows. Syndication is expedited when underwriters, borrowers, and investors can access and act on the same information in real time. When every party in a transaction chain is using the same timely, reliable, and accurate data, post-trade processes can accelerate, reducing timeframes for clearing and settlement and remediating the need to hold collateral against settlement risk.
3. Faster onboarding through better KYC. Onboarding is a necessary but highly inefficient process, frustrating to both providers and clients. After reviewing the large number of documents required and the degree of overlap between documents needed by different firms to complete onboarding, the Bank of England-sponsored Post-Trade Task Force recommended creating a core set of documents and suggested that “an optimal solution would be a centralised KYC passporting platform that could store the core documents most commonly required by firms”. These could “be accessed by all market participants when granted permission by their clients”. Although this could be one platform, it could also operate “like one platform even if there were multiple platforms involved and that there was wide market participation in it“. This could be a better option for a solution that might ultimately extend across multiple jurisdictions.
Interoperability and smart contracts offer logical ways to address this challenge. Interoperable technology would allow participants to ‘plug in’ and access information whether they are using traditional mainframe or ledger-based systems, without significant investment or the need to touch their underlying code. Smart contracts can be written with explicit role-based permissions, which can be readily updated as needs change (for example, if an institution wants a new provider to have access to their documents). Alerts and predefined conditions can also ensure documentation remains up-to-date: a transaction could be flagged due to an authorized signatory issue, with an alert automatically sent to all parties, or an institution could be reminded to update documentation on certain timeframes to preserve their ability to conduct business.
Ideally, the ability to prove identity digitally rather than with physical documents would truly unlock the onboarding process. Digital Asset is currently working with CAIS to store digital identities on chain, using explicit permissions to reveal information to the right parties only when it is needed. While the current project focuses on alternative investments, the potential for expansion to other asset classes could be a game changer to investors looking for a nimbler way to implement their investment strategy.
Regardless of jurisdiction, all transactions rely on reference data, all counterparties must be known, and all activity must be reported to the relevant authorities. And so, like other parts of the post-trade lifecycle, various components of these solutions are being developed or are in use today using demos and detailed use cases from Digital Asset on Daml-driven KYC, Reference Data, and Compliance and Regulatory Reporting.
Similar to earlier initiatives, some of these will deliver benefits to a particular institution or market. Other programs are looking at new ways to better share and use data across parties, creating the first iterations of interconnected networks. To achieve the full potential and lighten the data load, these connections will need to broaden and expand. When multiple parties and providers can access trusted and reliable data, the financial ecosystem becomes more robust and sustainable for the benefit of all.
Related reading
Blockchain Disruption in Security Issuance, Capgemini, 2016
Digital Assets, Distributed Ledger Technology and the Future of Capital Markets, World Economic Forum in Collaboration with Boston Consulting Group, May 2021
Corporate Actions 2021: From issuer-ready to investor-ready (2021) and Asset Servicing Innovation (2020), The ValueExchange
Citations
²Corporate Actions 2021: From issuer-ready to investor-ready (2021) and Asset Servicing Innovation (2020), The ValueExchange