The use of blockchain technology could unlock significant improvements for the structured products industry, reducing back-office costs and in turn opening up segments that otherwise would have been uneconomical to operate in, according to panellists on the Are Exchanges Best Placed To Deliver Indices And Trading Platforms? discussion at the 14th SRP Annual European Structured Products & Derivatives Conference in London.
Blockchain technology consists of the marriage between a data structure and an algorithm, where data transfer and storage is tamper-evident, meaning that changes are evident in real time to all participants, according to Lee Braine (pictured) a senior manager at Barclay's investment bank's chief technology officer (CTO).
One potential application of blockchain technology in the structured products space is the so-called 'smart contract', a programmable transaction and computer encoded logic that is capable of executing output subject to a set of pre-agreed input triggers, said David Futter, partner, digital economy team at Ashurst law firm.
Having autonomous smart contracts on a blockchain solution means that parties will bring both quantity and quality in terms of executing transactions, Futter said, noting that the blockchain solution acts not only "as a warehouse for secure storage of transaction code", but also "as the engine that drives the automated execution of the programmable transactions, in the form of smart contracts".
Daniel Franks, partner, derivatives at Norton Rose Fulbright noted that a fully self-executing contract with no human interaction and located completely on the digital platform is at the most ambitious end of the spectrum of potential blockchain use cases in the industry, but is also one of the more distant possibilities for now.
A more immediate prospect would be supporting back office functions with blockchain and smart contracts to speed up processes and lower costs, according to Sohail Raja, head of execution platforms at Societe Generale. "This is key," said Raja, adding that the tech and the costs it could save could open up and create new markets.
Matthew Van Niekerk, founder & chief executive of SettleMint added that when the need to spend significant resources for back office reconciliation is largely removed, lower costs could enable issuers to reach out to new segments that would have been uneconomic to market to otherwise.
Standardised agreements, like swaps under the Isda master framework, are a natural first target for smart contracts, the panellists agreed.
"We started off looking at certain swap agreements, and in partnership with Isda and SocGen showcased what the future could look like, with a master legal agreement tied to individual fields that fed to the smart contract which executed on the distributed ledger," Braine said.
Collaboration will be key to the future of the tech, the panellists agreed, as there are very few easy use cases internally, but an industry-wide standardised business logic would be immensely beneficial to all.
"The tech is there, but that's not the hard part," Futter said. "It's about the collaboration, getting regulators on board, and parties working together - that's where the thinking needs to be done, and that's where we will see development."
Van Niekerk said that US-Based blockchain trading platform T0 has already produced operational blockchain solutions, including issuance of publicly traded shares via its platform. T0 enjoys the full support of the SEC and Finra, according to Van Niekerk.
"From the tech and legal perspectives the precedent has been set, and it is now about the industry figuring out the best way to utilise this in the broader sense," said Van Niekerk. "Adoption rate of blockchain solutions will only increase, as we move from the more vanilla products to the more complex and structured ones."
Raja added that the rate of innovation and idea generation is 'incredible' and at the fastest pace in at least the past two decades. He stressed, however, that there are still a lot of challenges and a lot to learn, pointing out to identity, know-your-client (KYC), scalability and security as a few of the issues that need to be dealt with before moving forward.
Regulators are interested, they like innovation, Franks noted, adding that "we'll start seeing proactive regulation" in the space.
Van Niekerk added that from a product perspective, one interesting prospect would be a 'blockchain-traded fund', which would function much like an exchange-traded fund, but would be traded on the blockchain solution, increasing accessibility, speed of execution and lowering costs.
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