SWIFT and Singapore Exchange have announced their intention to launch a proof-of-concept around moving proxy voting onto a distributed ledger. If successful, the outcome could create a platform for fund managers and corporate issuers that sets a global standard.
The initiative has competition: Broadridge, a large software vendor to financial institutions, has launched a similar service in Europe that it has recently extended to Japan.
The difference is who’s driving the initiatives: a vendor, versus the combination of SWIFT, the bank-industry utility, and Singapore’s stock exchange, rooting the initiative in a particular market.
Agendas other than technical specs will therefore determine how and where these competing platforms go from here.
Long time a-comin’
In the meantime, the SWIFT and SGX program is only about to begin alpha testing, with software provided by French vendor SLIB (which provides proxy-voting systems) and with the support of four custodian banks: DBS, HSBC, Deutsche Bank and Standard Chartered.
Lisa O’Connor, Hong Kong-based managing director at SWIFT and head of capital markets and standards for Asia Pacific, says the payments utility has been looking to adapt its messaging standards to proxy voting for years, but found the data requirements from so many players impossible to muster.
It came down to a coalition of the willingLisa O’Connor, SWIFT
With SLIB, SWIFT first attempted to create a solution based on blockchain technology in France. But it couldn’t convince enough players to join – until SGX signaled its interest, and the project moved to Singapore last year.
“It came down to a coalition of the willing,” O’Connor said.
Proxy voting is one of those obscure functions that seems peripheral to financial services but is in fact a monumental pain for all concerned. Thus is sucks up resources by requiring tons of manual, paper-based reconciliation.
Proxy voting is important, though: fund managers have a fiduciary responsibility to vote at annual shareholder meetings or on corporate actions announced by listed companies. And votes are often the only way the managers of these companies interact with their shareholders.
“Different stakeholders have their own pain points, so it is hard to get everyone on the same page,” said Rajeev Tummala, senior product manager at HSBC Securities Services in Singapore. “But we all agree on wanting to help investors’ voices get closer to the issuers.”
Because it involves many players – fund management companies, end investors, listed companies, custodians, sub-custodians, stock exchanges, and a spaghetti bowl of tech vendors – proxy voting is one of those workflows that is impossible to automate with traditional, bilateral, sequential processes.
It involves getting votes to investors, giving them enough time to decide (yea, nay or abstain), collate the votes, execute the votes, and then analyze and distribute the results back to shareholders. This complexity, however, makes proxy voting an ideal candidate for automation at the marketplace level – which should be doable with a distributed ledger.
Different stakeholders have their own pain pointsRajeev Tummala, HSBC
Nico Torchetti, head of market services for equities and fixed income at SGX, explains that blockchain is more than just a workflow to automate voting. The use of smart contracts can also bring coherence to each participant’s rights and obligations, while cryptography can ensure against tampering of the data. This should reduce errors and enhance confidence around results impacting dividend payments, for example.
And by removing errors and manual processing, blockchain tech can also give fund managers or end investors more time to consider their vote, and give issuers real-time data and analytics around how votes played out, Torchetti says.
Now the parties in the PoC are going to find out whether that proposition is true – and in what ways.
For example, DBS serves both global fund managers investing in Singaporean stocks, and Singaporean investors through its private bank.
Soh Ee Fong, the bank’s group head of securities and fiduciary services, said she is keen to see what efficiencies can be derived for both institutional and retail clients. “Can we get this to work for all client segments?” she wondered. In the case of retail, although an individual investor’s vote is simpler (because institutions may have multiple instructions in a given situation), the sheer volume creates processing headaches.
DBS is also participating in the PoC as both a custodian and as an issuer – given DBS Bank is a listed company in Singapore. So is SGX, which is also participating as an issuer.
Can we get this to work for all client segments?Soh Ee Fong, DBS
There are no fund houses involved at this stage, but O’Connor notes that major buy sides are members of SWIFT, so they are represented indirectly.
Tummala at HSBC says there are other outcomes that the bank expects. One is to use this PoC to give its staff experience with DLT, and not just the digital and data teams.
Second is to experiment with various channels to communicate e-voting: via SWIFT ISO20022 messages, or via FIX messages (a protocol for communicating trades), or via APIs (software connecting two applications). The more options, the more likely buy sides will adopt the solution, as message preferences vary by market.
Finally, a successful PoC will encourage the coalition to take their solution to other markets – and thereby begin setting global standards.
The PoC is due to be completed some time in Q3 this year.