Martin Davis has decided to lay his cards on the table. He spoke with DigFinabout his backing a blockchain project being developed by software company FNZ to transform fund administration.
“We are staying engaged with this project because it needs public support,” said the head of Europe at Aegon Asset Management and CEO of its affiliate Kames Capital, who oversees €160 billion ($181 billion) of assets under management.
He realizes that a blockchain project means disrupting existing ways of working with service providers such as custodians and registrars (called transfer agents).
“We all have existing commercial relationships, so people are nervous about showing their hand,” he said. “It’s important that we be up front about this opportunity, and transparent, and do this in a consortium with other asset managers. We’re not after a competitive advantage [for Aegon], but moving the whole industry forward.”
The project in question is FNZ Chain. FNZ provides wealth-management software that asset managers use for fund admin and T.A., and is the dominant player in the U.K. market. Worldwide it processes $660 billion of assets under administration.
It has been working on a solution to existing headaches in how funds are processed for several years. Asset managers in the U.K. are being forced by regulators to apply more oversight to how they handle client money, at a time when their legacy technology is failing and firms are under massive strain as competing passive products erode their margins.
People are nervous about showing their handMartin Davis, Aegon
“The unit trust was created in the 1930s and its structure hasn’t changed,” said Phil Goffin, head of new technologies at FNZ in London. The only real innovation has been the exchange-traded fund. “The technology in our industry is analog…we knew the key to our future was to replace core fund administration.”
FNZ Chain is being developed to compress T.A., fund admin and fund-order routing, and remove all of the reconciliation that currently is required of fund managers, trustees, banks, registrars, and vendors.
Goffin reckons the industry can cut headcount by 40% if it moves these functions to a distributed ledger, as well as eliminate many processing errors and therefore risk.
Martin said: “Our industry faces huge costs of end-to-end delivery, from an individual’s giving money to an advisor or pension fund, to getting that money to our portfolio managers. It’s massively inefficient. DLT is not straightforward, but the cost savings will go straight to the customer. It’s a huge opportunity, it’s too compelling [not to pursue], but it can’t be done firm by firm. It has to be through an industry utility.”
The unit trust was created in the 1930s and its structure hasn’t changedPhil Goffin, FNZ
He says FNZ was a credible provider because it is a software company, not a competitor looking to take a bite out of the value chain; because it’s the biggest fund-admin software provider in the U.K.; and because it has a fund-admin business of its own that would be disrupted by going onto a blockchain.
Old business, new models
Once a critical mass of asset managers join the platform, they can begin looking at developing new products as well that could compete more effectively against ETFs.
FNZ says it has been running the DLT in parallel to asset managers’ existing processes, and that the first deployments should begin by the end of this year. There are about 20 parties, including institutional asset managers, participating.
Its platform can interoperate with other vendors with fund-admin offerings, such as Calastone – which has its own blockchain ambitions – and clearinghouses such as Euroclear. (Goffin also founded Calastone, in 2008, but left in 2014.)
FNZ Chain operates IBM Fabric under the open-sourced Hyperledger protocol. Goffin says FNZ chose to work with Fabric because it can operate in segregated markets under the same code, which will be especially important as the platform extends to Asia and Australia, which are next on FNZ’s list.
Asia remains especially manual: many orders to subscribe to mutual funds are communicated from bank distributors to T.A.s and then the fund house via fax. “The region is ripe for this,” said Harle Mossman, FNZ’s head of Asia business development.
Another reason why the firm works with Fabric is that it allows sidechains (transactions or communications that don’t take place on the blockchain), which helps satisfy local regulators’ rules about keeping data stored in-country.
Because the platform is dealing with fund subscription and redemptions – as opposed to millions of daily securities transactions – it has manageable requirements for scaling. Even so, it found Ethereum unable to scale enough. It also looked at R3’s Corda but felt it was too generic; Digital Asset doesn’t have a presence in the buy side, Goffin says.
In addition to DLT, FNZ is also developing machine-learning tools to help parse faxes and automate putting orders on the blockchain embedded as smart contracts. The firm is still supervising this with humans, but expects once it is proven, this will remove a lot of exceptions-processing that currently requires a lot of back-office labor. Goffin declined to name the artificial-intelligence company that has developed the solution.