A group of banks is testing blockchain technology as a way to better manage reference data for the products they trade.
Seven banks, including Citi, HSBC and Alliance Bernstein (AB), has joined R3, a bank consortium studying blockchain, and Axoni, a blockchain technology firm that uses blockchain in settling derivative transactions, to determine if the technology can simplify reference data processes, according to Axoni.
Working through the Securities Industry and Financial Markets Association (SIFMA), the companies completed a proof of concept (PoC) exercise that Credit Suisse coordinated over several months. The PoC built a distributed ledger prototype to enhance the cost, efficiency and risk management issues in managing financial reference data.
The new application marks another project in which banks are studying blockchain technology to reduce costs from their back-office systems. Banks are also testing the technology for derivatives, loans, international money transfers and commodities trading.
If banks could automatically share and update such data among themselves, they could reduce their reliance on the vendors they use for these functions. They could also exert more control over data that is now accessible to third-parties.
The prototype, created using Axoni’s proprietary distributed ledger software, Axoni Core, simulated the collaborative management of reference data, in addition to using the reference data for issuing corporate bonds.
Participants were able to interact with reference data after issuance. Any proposed changes requiring validation by the underwriter would ensure the ledger provided a single, immutable record of any data related to the bond.
Reference data comprises 40% to 70% of data used in financial transactions. It includes financial product specification, currencies, counterparty information, issuer detail, corporate actions and prices.
Reference data requires constant maintenance because securities data, counterparties and reference entity names change over time. The lack of automation and a reliance on legacy systems require each institution to maintain its own record of reference data, causing inconsistencies and requiring reconciliation resources. New regulations like the Dodd-Frank Act in the U.S. and EMIR in Europe have underscored the need for financial institutions to better manage and maintain reference data.
The prototype presented the potential application of distributed ledger technology (DLT) as a viable solution that can enable network participants and regulators to view in real time the parties on the ledger that have issued and proposed amendments to the record.
Moreover, the deployment of DLT facilitated automated data distribution across all participants. It also provided a model to manage conflicting data – presenting possible solutions to two leading causes of reference data inaccuracies.
The study is still in its early stages. The exploratory exercise was intended to promote a larger review of how DLT can be used to improve financial services operations.
“Quality of data has become a crucial issue for financial institutions in today’s markets,” said David Rutter, R3 CEO. “Unfortunately, their middle and back offices rely on legacy systems and processes – often manual – to manage and repair unclear, inaccurate reference data.” DLT enables financial firms to move such functions to a cloud environment, removing the need to reconcile numerous copies of data and removing headaches caused by legacy systems.
“This project demonstrates distributed ledger technology’s value in financial markets beyond commonly-discussed use cases such as trade settlement and cash movement,” said Thomas Chippas, Axoni COO. A reliable, synchronized, distributed reference data store will remove large amounts of replicated infrastructure and workflows among industry participants.
“Using blockchain and distributed ledger technology as a shared reference data backbone for the industry makes intuitive sense,” said Emmanuel Aidoo, who oversees Credit Suisse’s distributed ledger and blockchain effort.
The vision is to demonstrate how distributed ledgers applicability can expand beyond settlement and reduce duplicate reference data costs, Aidoo said. It also improves data latency, which will lower costs and limit operational risks.
SIFMA helped coordinate prototype testing and will review the potential application of blockchain technology in reference data.
Images from Shutterstock.
Last modified: October 6, 2020 4:54 PM