Distributed ledger technology—and more notably Blockchain—has stirred debate on many levels. Asset servicers have yet to tire about explaining the benefits and cost savings it could bring to their industry, while employees at central counterparty clearing houses and central securities depositories question whether their jobs are secure in this new environment.
Consider this: Blockchain for reporting
Its impact on fund managers seemed to dominate proceedings at the Fund Forum International in Berlin. Its impact could be felt on several levels, but regulatory reporting seems to be the most obvious. Fund managers across all asset classes must supply numerous regulatory reports to national authorities, many of which are highly intricate or nuanced. The regulatory arbitrage is a scope for concern at some managers who are under an obligation to ensure their regulatory data is consistent. Equally, the time-frames for regulatory submissions are rarely harmonised which further complicates the process.
Could history repeat itself?
This makes fund managers an ideal beneficiary of what Blockchain can offer. Reporting a single source of data to a database that is completely unchangeable would enable fund managers or the service providers to whom they have outsourced reporting to streamline their processes and enable potential cost efficiencies. However if multiple private Blockchains were to emerge, this could cause issues. Fragmentation is the stuff of nightmares for market participants and regulators. A fragmented Blockchain environment would be a case of history simply repeating itself insofar as market infrastructure is concerned.
There is a need for consolidators to ensure that there is integration on Blockchain. While fund managers tend to prefer customised products, this could be counterintuitive on Blockchain. Certain service providers have the resources and ability to pull together different chains and legacy databases, and enable consolidation. This is what the industry ought to be working towards.
We must come together.
It is essential that best practices and standards be formally agreed by market participants that utilise Blockchain technology. The big risk for Blockchain would be if bad data were allowed to proliferate. It is important that reporting to Blockchain is done in line with agreed standards and universal principles. Again, it is crucial firms work with providers who can cleanse and record data in line with best practice.
Working towards industry-agreed principles on Blockchain and its use should be a priority for financial institutions. The R3 Consortium consists of financial institutions and it is seeking to identify where Blockchain could help improve market processes and practices. At the Fund Forum in Berlin, Ann Doherty of J.P. Morgan agreed that “The industry needs to come together and work with regulators to achieve this.”
Regulators are on board
Regulators are reasonably supportive of Blockchain and other financial technology innovations. The Securities and Exchange Commission (SEC) publicly acknowledged that distributed ledger technologies such as Blockchain could play a useful role in regulatory reporting. Given some of the antiquated systems used by regulators, a move to Blockchain would make their lives far simpler and enable them to keep a more watchful eye on behavioural trends in the markets. However, other agencies have said financial technology providers–which includes distributed ledger technology–could present systemic risks, which obviously needs to be addressed.
One potential risk could be the impact Blockchain could have on legacy technology, which is in abundance at a number of financial institutions. Failing to properly integrate Blockchain onto legacy systems could result in operational risk. Much of the industry operates on legacy technology systems and databases. This would be something that Blockchain would need to be careful of.
In the near future?
Rough estimates of Blockchain’s adoption by industry participants are varied. Panellists at Fund Forum generally said that the technology could be live across markets within five to ten years. As such, Blockchain will be a long-term project for impacted organisations. Others, however, are more cynical and point out that previous efforts to work towards industry standards such as SWIFT or ISDA have not been renowned for their brevity.
By Lee Godfrey