Seven buy-side and sell side firms, including AB (Alliance Bernstein), Citi, Credit Suisse and HSBC, have collaborated with financial innovation companies R3 and Axoni to explore how blockchain technology could simplify reference data processes.
The group, working with R3 and Axoni through the Securities Industry and Financial Markets Association (SIFMA), recently completed a multi-month proof of concept (PoC) exercise, coordinated by Credit Suisse, that aimed to build a distributed ledger prototype that can enhance the risk management, cost and efficiency issues inherent in managing financial reference data.
The prototype was created using Axoni Core (Axoni’s proprietary distributed ledger software) to simulate the collaborative management of reference data, as well as the use of that reference data for corporate bond issuance. The technology enabled participants to interact with reference data after issuance, with any proposed changes requiring validation by the underwriter to ensure the ledger provided a single, immutable record of all data related to the bond.
Reference data makes up 40% to 70% of the data used in financial transactions and includes information such as financial product specification, issuer detail, counterparty information, currencies, corporate actions and prices.
Reference data requires constant maintenance as reference entity names, counterparties, and securities data change over time. Lack of automation and a reliance on legacy systems and processes currently require each institution to keep its own record of reference data, introducing inconsistencies and requiring resources for reconciliation. New and emerging regulations such as EMIR in Europe and the Dodd-Frank Act in the US have highlighted the need for financial institutions to effectively manage and maintain reference data.
The collaborative prototype demonstrated the potential application of distributed ledger technology as an agile solution which could provide the capability for regulators and network participants to view in real time which parties on the ledger have created, issued and proposed amendments to the data record. The implementation of distributed ledger technology deployed in this project facilitated ongoing, automated data distribution across all participants, as well providing a model to manage conflicting data – demonstrating potential solutions to two of the leading causes of reference data inaccuracies. The study of distributed ledger technology’s application to reference data is still in its early stages; this exploratory exercise was designed to encourage greater review and analysis of how distributed ledger technology could be used to enhance financial services operations.
David Rutter, CEO of R3, comments: “Quality of data has become a crucial issue for financial institutions in today’s markets. Unfortunately, their middle and back offices rely on legacy systems and processes – often manual – to manage and repair unclear, inaccurate reference data. Distributed ledger technology – which allows financial institutions to push these functions to a cloud environment – removes the need to reconcile multiple copies of data, providing a sophisticated and agile solution to the headaches currently caused by these legacy systems and processes.”
Thomas Chippas, COO of Axoni, comments: ”This project demonstrates distributed ledger technology’s value in financial markets beyond commonly-discussed use cases such as trade settlement and cash movement. A reliable, distributed, synchronized reference data store will eliminate vast amounts of expensive, replicated infrastructure and workflows across industry participants. It was a pleasure to work with R3 and the other participants. We look forward to helping this effort progress.”
“Using Blockchain and Distributed Ledger Technology as a shared reference data backbone for the industry makes intuitive sense. Our vision is to demonstrate how distributed ledgers applicability can go beyond settlement and help reduce duplicate reference data costs and improve data latency which will ultimately lower costs and reduce operational risks,” said Emmanuel Aidoo, who heads the Distributed Ledger and Blockchain effort at Credit Suisse.
SIFMA helped to coordinate testing of the prototype and will continue to work with its members to review the potential application of blockchain technology in reference data.