Citi is experimenting with putting corporate actions processing on a distributed ledger, one of several blockchain-related ideas in pilot mode, says C.P. Yap, Hong Kong-based head of custody and fund services for Asia Pacific.
A fintech lab in Tel Aviv is spearheading Citi’s blockchain research for fund accounting and operations, with the aim of reducing costs as well as changing workflows. The bank is working on this internally, without third-party vendors (unlike in corporate treasury, where its cash-management business is working with an external blockchain developer).
Yap says the biggest challenge to introducing distributed-ledger technology (DLT) is regulation. “We’re a licensed financial institution,” Yap said. Financial regulators are still researching the technology.
“They still ask us questions like where we store our database,” Yap told DigFin. “But that doesn’t exist in a decentralized world.” However he says the bank is looking for solutions that won’t impact the databases that regulators see, which means generating reports for regulators (or client compliance reports) would not change.
Integrating new tech
Another challenge is how radically new ideas like blockchain can be integrated into ongoing flows without disrupting the existing technology, which may be old but is stable and tested.
Blockchain has to integrate with our other systems
“If we use blockchain, it has to integrate with our other systems,” Yap said. “It can’t just be a new technology running in parallel.”
The bank is experimenting with corporate actions for U.S. equities, as it wanted to begin with a relatively narrow function, rather than try to use blockchain to replace all clearing and settlement infrastructure – but the bank also chose U.S. stocks because they are owned by investors worldwide, so any final deployment would be global.
“We’re pushing to complete this pilot this year,” Yap said. “It’s exciting.”
The biggest gain would be reducing costs, particularly in the maintenance of the bank’s current tech infrastructure. Its systems are stable, but costly to keep up, particularly as compliance needs are always changing. “Blockchain holds substantial implications for banks’ cost bases, but we have to take this step by step,” Yap said.
The second advantage would be providing cheaper service to clients, in this case institutional investors and asset owners. So far the bank has kept them informed of its project, but hasn’t involved them. “It’s very early stages, but we expect the way clients interact with us would not change,” Yap said.
The blockchain initiative is on the more speculative end of a four-pronged tech agenda within Citi’s custody and fund services business.
Blockchain holds substantial implications for banks' cost bases
Conor Hession, head of fund services for Asia Pacific, says the bank is working on solutions to improve efficiencies, to develop data analytics to serve clients, and to enhance the bank’s outsourcing offering to fund managers.
Hession says automating fund accounting and other functions previously involved wholesale solutions and comprehensive systems upgrades. Now the work is about shorter delivery times for smaller projects and more nimble technology.
Changing the business model
As a result, solutions are becoming more dispersed. For example, transfer-agency automation used to involve batch processing across the entire platform. But the overall industry infrastructure has become better, thanks in part to third-party vendors such as Calastone that make it easier for banks and fund managers to transfer files.
So competition among custodians is shifting to new ground. Banks can now work across a broader spectrum of file and protocol types. Fund managers might want to send them files about subscriptions or redemptions in formats other than Swift messages. Before, the bank would probably have to reject these as too costly, or charged clients for ‘exceptions processing’.
It's about which bank can cater to all formats
Technology has reduced the cost of reconciliation – and competitive pressures mean banks now win business by both slashing fees as well as accepting unconventional ways of communicating with their counterparties.
“It’s no longer just about catering to Swift or other common formats,” Hession said. “Now it’s about which bank can cater to all of them.”
The custody teams are also using big data for client analytics. Custodians have always been data providers; now they are using data to try to help investors manage a host of complex activities, from fund accounting and risk analysis to reporting and business planning.
Lastly, Citi is using tech to bolster its business of running back and middle offices for buy-side clients. The traditional outsourcing business involves a bank taking buy-side functions onto its proprietary system, but the advent of APIs mean clients may be able to customize the service, downloading and manipulating data as they require.