GC: Congratulations on your award! Being part of the first technology firm to win the IPOTY award, is that a reflection of the industry trend that non-banks are playing an increasing role in securities services?
KM: Winning IPOTY is a great honour, and doing so as part of Digital Asset highlights the evolution we’re seeing in how securities services are defined and provided. We are dealing with a securities services environment where revenues are lower than they have been in prior years, interest rates and spreads are still low, and volatility comes in a series of painful fits and starts. At the same time, there is rampant competition, not only from established providers looking to improve margins, but increasingly more from new-comers who are often unregulated and definitely not structured the same way as conventional securities services providers.
The result is the emergence of many non-traditional providers who enjoy an unlevel playing field. As a consequence, both new providers and the incumbents are turning to emerging technologies – including DLT or distributed ledger technology – to improve their competitive stance and delight their clients with solutions that transform operating models and create the foundation for products and services that would have previously been impractical or impossible to consider.
GC: What is the catalyst driving DLT adoption for clearing and settlement workflow?
KM: It’s the opportunity to automate workflow between multiple parties – such as buyers and sellers of an asset and their brokers, custodians, and their cash banks – using a shared ledger that all of these parties can interact with and utilise with the confidence that the data retained by the ledger is consistently and reliably in sync, fully reconciled, and only accessible via predefined permissions.
This is possible because the data is never siloed, separated or segregated. It isn’t duplicated across the parties’ operations areas, and thus is not prone to separate interpretation and use. It is a single golden source of data that accurately and immutably represents what was done by the parties to a transaction.
Critically, the workflows are mutualised, reducing cost and risk. Workflow is also automated because the rights and obligations of each party are defined, known, examinable and consistent with legal agreements. Actions are certain to be performed exactly as the parties have defined using smart contracts.
When applied to clearing and settlement workflows – where multiple parties have different and changing rights and obligations across the lifecycle of a transaction, and where current processes are unnecessarily duplicative and error prone – the advantages DLT presents are significant.
GC: What is the end-goal from a clearing and settlement perspective? Is it about having a completely digital environment?
KM: I think the aim would be to get to an environment where market infrastructures that facilitates the transfer of assets – or the transfer of value – is supported by technology that enables counterparties to come together in a structure that is more transparent, less hindered by batch processing and time-zones, and less heavily reliant on commoditised services of middle- and back-offices.
While I don’t know if we’ll see a future where every asset is digital, the end goal of a more advanced infrastructure is the same. Data is the key – data powers everything in the connected economy. Increasingly, firms are reorienting their strategies around digital transformations that speak to the imperatives of enhanced customer experience, process simplification, cost reduction, speed and accuracy—all of which has to have a foundation of accurate underlying data. If you’re spending the bulk of your time disagreeing with a counterparty about the accuracy of the transaction record to which you are both party and which, depending on your market, up to a dozen entities have a stake in, how are you ever going to intelligently satisfy your clients?
The challenge for financial services is to leverage this technology in a way that preserves the value of the services and the essential oversight of assets.
GC: Is there a certain moment that needs to happen for custodians and clearing banks to come on board to the idea of smart contracts?
KM: The real catalyst for change will come from doing the actual work of modelling workflows and creating smart contracts. That is, the exercise of examining activities across multiple parties, expressing contractual rights and obligations across a lifecycle of actions that drive the most meaningful businesses cases.
The industry is beginning to move beyond proof of concepts and focusing instead on production mandates. In doing so, the attention is on the mutualisation of infrastructure and the opportunity for considerable cost savings by essentially being able to eradicate zero-value work associated with reconciliation. Operating from a common record will also reduce the number of errors, and the associated risk. However, in terms of opportunities, DLT isn’t just about cutting costs, it’s about deeply connecting independent entities – even competitors – in a way that preserves data privacy and integrity at scale, coordinates multi-party workflows and results in higher quality data.
This is what 2019 will be about – the chance to go beyond proofs of concept and get into production mandates with the demonstrable quality and stability required of enterprise systems. In the same way the internet took time revolutionise commerce and information access, the use of DLT is going to be focused on proving out workflow scope, scale, performance before it will become pervasive.
GC: Are attitudes changing to the practicality and strategy of organisations adopting this technology?
KM: The emphasis is certainly shifting toward business cases with solid outcomes – the elimination of unnecessary steps in clearing and settlement processes, the reduction of risk and associated capital costs in operating processes, the ability to expand STP across client and counterparty activities, the creation of new services. It’s on real business challenges that current technology, marked by separated workflows and duplicated data stores, cannot address.
HKEX, for example, is looking at how DLT can solve real-world business challenges better than the systems in use today. We have had the opportunity to work with them on a prototype that demonstrates how the Northbound Stock Connect programme can become more accessible to global investors. Their goals focused not only on validating the technical feasibility and applicability of using DLT, but also on driving direct connectivity to a broader range of market participants and automating much of the complex multi-party workflow for trade allocation and settlement initiation.
So, yes, the attitude toward DLT in financial services and other industries is shifting. As with most change involving enterprise systems in highly regulated markets, change occurs only when solid business cases can be solved with innovation. Adoption will not be overnight, and the work to prove that DLT can address practical business needs is not complete. But, the work has materially advanced such that the evaluation of DLT has advanced as a topic of discussion among global institutions, industry infrastructure entities, regulators and business leaders around the world.