Distributed ledgers technology also known as Blockchain, offers a new way to data management and sharing that is being used to propose solving many inefficiencies affecting the financial industry. Technology experts, Fintech start-ups, banks and market infrastructure providers are working on underlying technologies and its potential use in the industry. However the journey of such transformation may take long. In this post we will focus on the benefits and architectural changes Blockchain could bring to capital market, and some example from such appliances across exchanges around the world.
The potential benefits of Blockchain technologies could cover different process within different stages in capital markets. In order to expose why capital markets would pursue to Blockchain technologies its worth taking a look at the benefits across pre-trade, trade, post-trade and security servicing.
Blockchain technology will establish more transparency on verification of holdings. Additionally it reduces the credit exposure and making Know-your-customer way simpler.
For this stage, Blockchain technologies provide a more secure, real-time transaction matching and a prompt irrevocable settlement. Blockchain could also help automating the reporting and more transparent supervision for market authorities, we could add higher standards for anti-money laundering.
In this regard it eliminates the demand for central clearing for real time cash transactions, reducing collateral requirements. Blockchain technology enables quicker novation and effective post-trade processing.
Securities and custody servicing:
Distributed asset ledgers with flat accounting structures could remove some of the role which custodians and sub-custodians play today. Custodians’ function might change to that of a ‘keeper of the keys’, managing holdings data and ensuring automatic securities servicing operations are done correctly. To that end we could also add advantages such as common reference data, simplification of fun servicing, accounting, allocation and administration.
Nasdaq has become the forefront of blockchain revolution, they have and are currently involved with many blockchain jobs. To name these endeavors, it started with Nasdaq Linq blockchain ledger technology. Linq is the primary platform in a recognized financial services firm to show how asset trading could be managed digitally through the usage of blockchain-based platforms. Nasdaq has continued more to blockchain, showing that, it is working to develop a trial utilizing the Nasdaq OMX Tallinn Stock Exchange in Estonia which will discover blockchain technology being used as a way to reduce obstacles preventing investors by engaging in shareholder voting. The intention is to boost efficiency in the processing of purchases and sales of fund units and also to make a device ledger — a place which currently is primarily characterized by manual patterns, longterm cycles and newspaper driven processes.
London Stock Exchange developed to simplify the tracking and management of shareholding information, the new system plans to make a distributed shared registry comprising a list of all shareholder trades, helping to open up new opportunities for investing and trading.
Australian Securities Exchange (ASX), is all about the replacement of this system that underpins post-trade procedures of Australia’s money equity marketplace, known as CHESS (the Clearing House Electronic Subregister System). ASX is working on a prototype of a post-trade platform for the cash equity market using Blockchain. This initial phase of work was completed in mid-2016. In December 2017 ASX completed its own analysis and assessment of the technology which included:
- Comprehensive functional testing of the critical clearing and settlement functions currently performed by CHESS
- Comprehensive non-functional testing (scalability, security and performance requirements) for a replacement system when deployed in a permissioned private network
- A broad industry engagement process to capture users input on the desired features and functions of a replacement solution
- Third party security reviews of the Digital Asset DLT based system.
The Korea Exchange (KRX), South Korea’s sole securities market operator, has established a new service where equity shares of startup businesses may be traded on the open marketplace. The Coinstack platform will offer record and authentication options for your KSM by checking against client references which have already been provided to the platform by Korean banks such as JB Bank, KISA, Lottecard, Paygate in addition to others.
Deutsche Börse Group has developed a theory for riskless transfer of commercial bank funding through an infrastructure based on distributed ledger technology. By combining blockchain technology using its proven post-trade infrastructure, Deutsche Börse aims to achieve efficiencies while at exactly the same time investigating possible new business opportunities enabled by this technology.
Japan Exchange Group: IBM had teamed up with Japan Exchange Group, which works the Tokyo market, to begin experimenting with blockchain technology for clearing and other operations. IBM says it expect the technology will reduce the cost, complexity and speed of settlement and trading procedures.
On 26th of October 2017, the “Trading CEE: Equities and Derivatives” conference took place in Warsaw. This is one of the most important financial industry related events in Central and Eastern Europe. The co-organizers of the event were the Warsaw Stock Exchange, the Global Investor Group and the National Depository for Securities. Michał Różański, CEO of Empirica took part in a panel devoted to the future of the fintech industry.
The Trading CEE was held in Warsaw’s Hilton hotel, where several hundred capital markets experts had the opportunity to talk about such important issues as the Mifid II regulation, or the scale of the fintech revolution in Poland and internationally.
They also discussed the decision made recently by FTSE Russell (the supplier of indices belonging to the London Stock Exchange group) to change the status of Poland from that of an Emerging Market into that of a Developed Market and considered the significance of this shift for the national economy.
Among many of the excellent speakers, we had the change to listen to Marek Dietl, President of the Warsaw Stock Exchange and Toby Webb, Head of EMEA Information Services FTSE Russell. The inaugural panel on the opportunities and threats facing investment markets in our region gathered such experts as Ales Ipavec, head of the stock exchange in Ljubljana, Richard Vegh from the Budapest Stock Exchange, Ivan Takev, head of the Bulgarian Stock Exchange and Head of International Sales of the Moscow Stock Exchange Tom O ‘ Brien.
Fintech Innovation Forum
The panel regarding the fintech industry was very popular among visitors, especially the topic of the development of tools based on artificial intelligence and their impact on investment markets in Poland. It was organized in such a way as to allow for 4 of the most promising Central & Eastern European companies in the modern financial technologies industry to present what they offer. One of the main participants of this part of the Trading CEE conference was Michał Różański, CEO and founder of Empirica, the fintech software house.
During his speech, he focused mainly on the presentation of innovations in the field of robo-advisors, which are already revolutionizing the global investment market.
– The robo-advisor platform is not only the future, but the present of wealth and asset management. Our Empirica Robo Advisor service stands out in the international market above all through its very high level of support for advisors in their work with the service’s users. All this is thanks to solutions in the field of AI analytics, which allows them to receive a full picture of the actions taken in the user profile and to quickly respond if these actions threaten the assets, which in the end also reduces the risk of losing the customer. Another important element of our consulting service is the fact that we have built it based on the strong foundations of our platform for Algo Trading. Thanks to it, our robo-solution has fully automated access to the data stream coming from the most important financial institutions at every stage of the Empirica Robo Advisor process. – explains Michał Różański.
New generation of users
Platforms from the robo-advisor category not only democratize investment opportunities, but also reduce the price of consultancy services. In an era of technological revolution, a millennial generation is slowly entering the capital market- people accustomed to continuous presence in the online world. Advisory platforms will enable it for them. Friendly user interfaces, notifications that they know from social media and an automated transaction system based on a personalized portfolio are already present in the fintech area. However, in order for these tools to function in such a complicated environment as the financial market, powerful computational engines based on artificial intelligence (AI) must be behind them. Empirica helps financial companies enter this world by providing an advisory platform that automates the asset management processes and is based on innovative solutions in the field of data processing. – adds the CEO of Empirica.
Empirica is a Wrocław-based company that offers services such as an Algorithmic Trade Platform implemented with successes on the Warsaw Stock Exchange, solutions from the category of fully automated advisors (robo-advisory platforms) and software built on the basis of blockchain technology.
The exploration of Blockchain applications in the securities Industry has already begun and seems possible to pick up steam in the next several years. Many financial institutions have created in-house teams and study labs to construct and examine Blockchain networks, or are working together with third party sellers specializing in this space. In addition, companies have sought to participate in collaborative efforts with consortia to develop a frequent Blockchain frame and make industry standards.
The used cases of Blockchain applications are between the equity, debt and derivative markets. Since the implementation of these Blockchain applications advances, issues are being raised concerning how processes involving Blockchain fit within the present regulatory framework. In light of the trends, this section highlights some key factors linked to Blockchain execution and regulation.
Developing Blockchain applications in the securities Industry can present many challenges. In trying to overcome those challenges, some of the essential considerations for market participants in executing a Blockchain network may consist of governance, operational architecture and community security.
One of the key governance principles of the Bitcoin Network Was to establish a “trustless” environment open to the general public, where no single party is responsible for, or enabled with, governing and operating the network. Although this kind of network may offer certain advantages like providing a decentralized system which isn’t dependent on any particular party to operate, it may also pose some vulnerability in case it contributes to inefficient management of the machine. As an instance, recent events have shown that lack of a central governing body for its evolving Bitcoin Network has generated concerns for the system, as participants try to ascertain an approach to handle greater transaction volume. Therefore, a Blockchain network dependent on the use of a trustless system, where no party is responsible or liable for the appropriate operation of the machine, may pose risks to investors and markets. Many market participants are working to use private Blockchain networks using a governance structure that takes into consideration that participants in the network are generally known and trusted parties.
When setting up or engaging in a private Blockchain Network, in which multiple organizations across the sector are involved, a number of the first governance questions that need to be answered relate to the operation of the network and deciding that bears responsibility for it. Below are the types of questions that market participants may wish to consider when creating a governance structure to get a Blockchain network.
· Can the governance arrangement for the Blockchain system be determined by a single entity or a set of firms? How would the pursuits of end-users, that aren’t participants on the community, be represented?
· Who would be responsible for ensuring adherence by amateurs to the prerequisites established for the Blockchain network, and how could this be ran?
· Who would be accountable for the day-to-day operation of this system and resolving any technical problems on the network?
· Who would be responsible for setting and maintaining a affordable business continuity plan (BCP) to your network, to address some unanticipated emergencies or significant business disruptions?
· How would any conflicts of interest in the performance of or participation on the community be addressed?
· How would mistakes or omissions about the Blockchain be mirrored or rectified?
A Vital concern for market participants in executing a Blockchain system is discovering the operational structure of the network. The operational structure of a Blockchain system would normally include creating a framework for: (1) network participant access and related on-boarding and off-boarding processes; (2) trade validation; (3) asset representation; and (4) data and transparency demands. Following are a few locations that market participants may want to consider when creating such a framework.
On-boarding, Off-boarding and accessibility:
It is vital for a Blockchain system to launch, as portion of its operational infrastructure, the standards and processes for establishing and keeping participating members and determining their level of access. Especially, in developing a Blockchain community, applicable parties may Want to think about how they would:
· Establish eligibility standards for participants to gain access to the network;
· Establish a vetting and on-boarding procedure for new participants, including establishing an identity verification process and executing proper user arrangements prior to on-boarding;
· Grow an off-boarding process for participants that may be non-compliant or disqualified for violating securities laws, rules and regulations or for violating system rules; and establish exclusion criteria to discover previous participants which might have been disqualified;
· Memorialize the terms of engagement and code of conduct required from all participants;
· Establish varying degrees of access for different player groups (e.g., direct network participants . indirect users running transactions via direct participants)–that might include restricted access to certain data sets, and even constraints on ability to read or write about the shared ledger; and when the network includes global participants or entities from different countries, it may be desired to present special focus on regulatory requirements in those various jurisdictions, particularly as it relates to privacy and information sharing; and
· Determine which sort of access would be given to regulators.
As previously described different kinds of methodologies before launching a transaction identification methodology, network operators are most likely to evaluate the advantages and disadvantages of each methodology. In doing this analysis, some prospective questions network operators might desire to consider are mentioned below.
· If consensus-based, would it take a proof-of-concept or would it be an easy consensus algorithm? How much latency and sophistication would that add to the validation process? What is the risk of collusion by multiple parties to validate a fraudulent transaction?
· In case single-node verifier (i.e., one single node will be responsible for confirming all transactions), how would that verifier be determined? Is the simplicity and speed of a single-node verifier value the concentration of risk? What would be the backup or recovery process in the event the single-node is unavailable or endangered?
· How would the amount of nodes needed for verification be determined? If other nodes or arbitrary nodes are put up as verifiers, how could the order be established? Does this procedure expose the network to possible dangers from a number of nodes?
· What procedure will the system embrace to rectify or correct any erroneous entry that may be recorded on the shared ledgers?
To the extent an asset is represented on a Blockchain network, Operators will need to determine how those assets will be based on the community. Following are a few factors operators may want to take into account in the investigation.
Will assets be directly issued and digitally represented on The system? Or would they be issued in traditional form and subsequently tokenized on the community? Would the network consider both kinds of asset representation?
• If tokenized, what extra security dangers and complexities are posed? How would any loss or theft of the conventional off-chain advantage be managed? How would asset fluctuations (e.g., stock splits and conversions) be handled?
• Will the network only permit new advantage issuance or can it allow on-boarding of present assets?
How would money be represented on this network? Industry participants are contemplating a variety of versions to ease the cash aspect of a transaction settlement. For instance, in a recent effort, a few banks are tinkering to create a virtual “settlement coin.”
• If cash-backed settlement tokens are utilized, would these tokens be termed as virtual money? Could there likely be a scenario where multiple such native tokens are made by various networks or companies? In that case, are they tradable?
• If fiat money (i.e., money that’s created by the authorities of a country to be utilized as cash) is used and settlement happens off the system through a conventional cash payment process, how, when, and from whom will the trade and asset transfer be recorded on the network?
• How will a participant’s ability to fulfill the money obligation be determined? Can a deposit be accumulated from network participants to be utilised in the event of non-payment? How will this type of deposit be calculated?
Savings and upsides from decreasing syndicated loans settlement time
While the High-Yield Bond transactions are settled in more than three days, the settlement interval for leveraged loans frequently extends to almost 20 days. This creates increased danger and a liquidity challenge from the leveraged loan market, hampering its growth and attractiveness.
Since 2008, the global loan market has witnessed negative gain, whereas the High-Yield Bond market grew by 11 percent. We assume that smart contracts can reduce the delay in procedures such as documentation, buyer and vendor affirmation and assignment arrangement, and KYC, AML and FATCA checks, with the assistance of a permissioned ledger. With estimation that with the decrease in settlement times, if the rise of loans may be at least half that of their High-Yield Bond market growth (i.e. between 5 percent and 6%), it would amount to an additional $149 billion of loan demand on the industry. Such loans generally carry 1% to 5% of fees, translating into extra income of $1.5 billion to $7.4 billion to investment banks. In addition, operational expenses, regulatory capital requirements and costs related to delayed compensation payments throughout the settlement of leveraged loans will probably be decreased together with the shortening of the settlement cycle.
Mortgage business to benefit from adoption of smart contracts
The mortgage loan process is dependent upon a intricate ecosystem for the origination, financing, and servicing of the mortgages, including costs and delays. Smart contracts could reduce the price and time involved in this process through automation, process redesign, shared access to electronic versions of bodily legal documents between trusted parties, and access to external sources of information such as land records.
Our earlier study on banks back-office automation suggests that mortgage lenders may expect savings between 6 percent and 15% from business $149 billion added leveraged loan volume increase with a reduction in settlement times 11 client fills mortgage application with earnings, taxation and property details Are property documents valid and lien status in order? Reject loan application and inform the client credit mortgage accounts article verification of earlier measures calculation of the cost savings possible from the usage of smart contracts in the US mortgage sector register bank’s lien on land signatures confirmed and mortgage accounts generated customer signs the mortgage document in addition to the witness mortgage record created approved rejected credit history id check KYC & AML check check income and land LTV reject program and notify the customer mortgage adviser creates loan workflow and updates credit, id, KYC, AML information in bank’s loan workflow for mortgage origination predicated on sale of 6.1 million houses of which 64% are being marketed on mortgage mortgage loan origination cost for an average loan of $200,000 in the US (2015), minimum savings US$ 4,349.5 17 billion 396.3 (9.1%) 1.5 billion 1,528.4 (35.1%) 6 billion. These numbers, coupled with our experience and discussions with industry experts, helped us estimate anticipated savings for each of the processes involved in loan origination. For example, in the US housing market, almost 6.1 million homes were sold in 2015. Based on historical averages, 64 percent of them were bought by home owners with a mortgage. We estimate that minimal savings of $1.5 billion could be achieved by loan providers through the automation of tasks in their organizations. Further, economies of $6 billion could be achieved once external partners such as credit scoring companies, land registry offices, and tax authorities become accessible over a blockchain to facilitate faster processing and reducing costs.
We also estimate that loan clients could expect a 11% To 22% drop in the entire price of mortgage processing fees billed to them if smart contracts are adopted. The total of outstanding mortgage loans across the united states and European Union countries in 2014 was valued at $20.98 trillion. Based on the US mortgage market case, smart contracts may possibly save between $3 billion and $11 billion in the new mortgage origination process across the US and EU.
Claims processing cost savings at the motor insurance industry
We consider that, in the motor vehicle insurance industry, smart Contracts that bring insurers, clients and third parties to a single platform Also, third-parties like chargers, transport providers and hospitals — once They are part of the dispersed ledger — will be able to supply faster Support against promises to clients and can anticipate quicker settlement of claims. The united kingdom motor insurance industry dropped 3.7 million claims and spent $13.3 Billion in claim expenses and costs. We calculate that roughly $1.67 Billion, or 12.5 percent of their overall costs, might be saved by adopting smart contracts. Dependent on the United Kingdom motor insurance market, we estimate that each year $21 billion could be spared from the global motor insurance industry via the Usage of smart contracts. A portion of savings can be passed on to the Clients via reduced premiums on motor insurance policies. We estimate that the Cost savings amounts to a reduction of $90 on average on each premium payment In the event the insurers pass on each of the savings generated from smart contracts Adoption to customers, and $45 per premium in the event the insurers decide to pass On only 50 percent of economies.
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