Magazine Issues » September 2019

Sponsored feature: Deutsche Bank’s smart idea

DubaiBoon-Hiong Chan of Deutsche Bank explains how DLT can be used to create new operating leverage and value-add from issuance and downstream post-trade processes.

A major area of development within blockchain – the distributed ledger technology (DLT) that acts like a decentralised database – is in the realm of ‘smart contracts’. 

Smart contracts consist of codes that run on an autonomous basis, designed to facilitate the automated verification and enforcement of contracts according to agreed financial instruments’ rules.

The attraction – apart from the removal of some ‘middlemen’ roles – is that contract-based and rule-based executions become precise, automatic and nearly instantaneous.

In an asset management context, the tasks that smart contracts could be deployed on span the “tokenisation” of new cash-flows to create new digitised asset classes with more transparent risk information and real-time reporting, to the distribution of income from such digitised assets. Depending on the DLT technology used, it can even bring its own digital communication channel.

The efficiencies that could be gained are huge and very appealing to an industry that is repositioning core capabilities to deliver digitised value, says Boon-Hiong Chan, Global Head, Market Advocacy, Securities Services at Deutsche Bank Corporate Bank.

Smarter bond contracts
Deutsche Bank’s securities services group has been investigating digitisation as a basis to generate and deliver new value to clients and markets.

The projects have included the successful real-time settlement information “DEBBIE” application programming interface and DLT applications to bring out new efficiencies for investors, portfolio managers, global custodians and other clients. By being on the same platform to achieve concurrent processes, says Chan, the securities services group would be “able to serve and add value in the securities servicing process instead of at the tail end, where much of the work typically takes place”.

He explains: “At the level of a participant’s process-flow, DLT is able to shift and aggregate value-creation points using codes which enable a repositioning and aggregation of activities. Burdensome manual paperwork and needs for coordination by multiple teams is replaced by automation, saving time and money.”

Elaborating, he says codes in a DLT-based bond, for example, can include calls on investor and compliance awareness rules as well as asset lifecycle rules to automate actions.

At the formation of a bond issuance, a new source of value creation would be created because some of the work carried out in securities services, which would normally be done later, could be dealt with at that earlier stage. For example, transfer agency-registrar allocation activities, governance functions such as investor restrictions, income calculations and distributions, and corporate action activities, not to mention other actions in the securities lifecycle.

A brighter future
Although there is often a fear that technology will replace humans, this is not the case, says Chan. Instead, the roles of post-trade participants in the digital ecosystem will change.

Boon-Hiong_Chan.While there will be commoditisation of some roles, it will take time and there will also be the creation of new opportunities and jobs that demand different expertise. The challenge is to anticipate what these will be and to ensure people have the appropriate skills to move forward with the changes.

The technological changes that appear to be facing, supporting and challenging the industry come at a time when asset management is feeling many strains. The hope is that the technology will help.

Since the financial crisis, firms have been battling low interest rates, increased competition and tighter regulation.

More recently, rising geopolitical tensions, fee scrutiny and a switch to passive investing have affected bottom lines, and innovative and cost-effective digital solutions can produce ways to new growth. However, it is still early days and there is more work to be done, especially in the post-trade arena, Chan says.

Although digitalisation is a work in progress, its potential to transform the post-trade ecosystem should not be underestimated, he adds. “It offers fund managers the ability to automate, streamline and extract value. This is particularly useful as margins are likely to remain depressed for the foreseeable future. Studies show that global assets under management will grow, but the pressure to lower costs across the board will continue.”

Industry observers may note that, to date, most of the time and energy spent on digital transformation has been focused on front offices: for example, technology to build new revenue and compensation models, or to boost product development and value-add services.

Streamlining the downstream operations is also a key priority, but investments in the post-trade space would appear to have been less urgent, even though regulation has touched every aspect of back and middle-office functions. Clearing and settlement, record-keeping, reporting, collateral management, reconciliation... the monumental quantities of data required for regulatory reporting requirements over the past 11 years are all areas where tech innovation is taking place.

None of this is helped by the post-trade architecture that is dominated by legacy systems and manual processes. Often too many people are involved in the various steps, leaving the door wide open to operational errors.

Chan highlights cross-border transactions as another example. The chain is long, sequential and has many moving parts as the trade moves from the asset manager, to broker-dealer, to global, then sub- custodian before landing at a local clearing and settlement house.

DLT has therefore become one of the most talked about solutions, bringing the promise of faster transactions and real-time, reliable data. Concurrent communication, managed by various participants, should also make fraud and manipulation much harder.

Pace of change
Market participants are moving into digitisation. Stock exchanges, for example, are actively adopting DLT trading, integrating the technology into their core systems and post-trade activities.

What is clear is that the operational functions of asset management are no longer out of scope for DLT development and creating a smart-contract system for the front-to-back tokenised asset issuance to trading and custody stream could bring many benefits to the industry.

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