One of the benefits of blockchain-based projects at Australia Stock Exchange and Hong Kong Stock Exchange is they will eliminate the bulk of post-trade processing.
No more reconciliations between investors, corporates, brokers and custodians – because all relevant data is tracked on a shared ledger. Ditto for the paperwork among fund managers, distributors, registrars and transfer agencies, once tracking fund subscriptions and redemptions and cutting NAVs is fully automated in one network.
If you’re a global custodian banker, is it time to dust off the C.V. and make new friends on LinkedIn?
BNP Paribas Securities Services is embracing blockchain, A.I. and other digital technologies to reinvent the custodian of the future. It has recently announced plans to introduce “smart elections” for shareholders in 2021, a project done with blockchain vendor Digital Asset.
Gary O’Brien, Hong Kong-based head of custody and clearing products for Asia Pacific, said, “The core role for us is in asset services, reporting and settling transactions. But we are also taking client requests and transaction details to the market in the format they need, and vice versa.
“That’s even more the case as we look at distributed-ledger technology and API connectivity,” O’Brien said. “We need to make options available to clients to suit their investment journey, provide flexibility as clients evolve, and provide value from integrating them with data sources.”
He says this is in line with what ASX is doing with replacing Chess, its post-trade infrastructure, with DLT solutions. “It’s about how we as a custodian will receive data on their platform, new types of data they will bring, and how it will benefit us, our clients, and our clients’ clients.”
Many blockchains, one language
The bank is using Digital Asset’s programming language, DAML, to write smart contracts to automate those processes that have remained manual. The technology, which elevates workflows out of the level of a single company and expands it to the level of the industry, allows these contracts to make decisions by accessing and analyzing data in ways that aren’t possible otherwise.
With HKEX’s Project Synapse, for example (connecting global asset managers to China’s T+0 environment for equities), the traditional custody role of processing changes to making data concurrent – that is, making it available in real time to all relevant participants, so that the data results in automated outcomes without breaching compliance or privacy controls.
The bank’s smart elections product for corporate actions is its first use case, says Luc Renard, head of financial intermediaries and digital transformation in Asia Pacific.
It is developing apps with Digital Asset to provide regional market participants real-time access to ASX and HKEX’s anticipated DLT-based trading and settlement platforms. Bank customers in other markets that aren’t operating DLT post-trade infrastructure can also access the apps and benefit from the real-time workflow.
Investors, prime brokers, issuer companies, registrars and others will receive corporate-action information such as dividend reinvestment or purchase offer decisions simultaneously, eliminating a lot of reconciliation work and enabling fund managers to make decisions more quickly.
Change at the industry level
O’Brien says this will have real-world implications. Say a hedge fund faces a Friday market close at 5pm. Today, they must instruct their service providers what to do by 5pm Wednesday or maybe 9am Thursday, because it takes time to ensure everyone’s records match and securities and cash settle by the close.
This creates a two-day gap between instructions and market close, exposing the investor to market moves.
“The right decision at 5pm on Wednesday on whether to reinvest dividends may not be the right decision at 3pm on Friday,” O’Brien said.
It’s not just that maybe a stock goes up or down in that window. It’s that investors need to choose between taking cash or taking securities, which they would use to finance other trades and hedges.
With smart contracts, investors gain two benefits. First, they won’t have to make the final decision until much closer to a market’s close, so they can utilize their capital more freely. Second, the smart contract can make the decision for them based on algos measuring events, prices and market conditions – including circumstances that are unclear and so should be routed to a human for a decision.
“This reduces the manual demands on portfolio managers, reduces their risk, and gives them information that’s more current to actual market deadlines,” O’Brien said.
Renard says the electronic voting for corporate actions is just one part of a broader transformation at the bank. Its efforts include enhancing client experience through new data sets and means of extracting insights, as well as industrializing the bank’s internal processes.
“Reconciliation is now standardized,” he said. “We’re looking at new use cases.”