The custody workflow is set to change over the next few years as securities market infrastructures integrate distributed ledger technology (DLT) into their operational core, according to Kelly Mathieson, head of financial product at Digital Asset.
“There are three groups that we see emerging,” says Mathieson, a 2013 inductee in Global Custodian’s hall of fame for her work at JP Morgan. “The first are entities that tend to have both local and global custodians within their organisations. Many of these are taking a prescriptive look at their technology to determine how they may be able to participate directly in market infrastructures where this technology is being contemplated.”
In Australia, for example, where the operating environment is set to change as Digital Asset works with the Australian Securities Exchange (ASX) to implement a new DLT-based clearing and settlement platform, maintaining a separate local and global custody structure may no longer be necessary. “DLT technology can allow for a global custodian’s accounts to be held directly at a CSD,” says Mathieson, though local custodians will still be valued for their expertise in areas of asset servicing, such as tax and proxy voting. Such custodians, she suggests, will begin to look at collapsing their operating infrastructure to gain the efficiency benefits of no longer needing to maintain duplicate accounts.
Mathieson does not see the risks of disintermediation from this technology as high, however. “Unless the ultimate beneficial owners, such as teachers, firemen or civil workers decide they want to administer their own assets on the distributed ledger, there is going to be a need for custodians,” she says. “There is, after all, still the agency function and the ability to oversee activities associated with managing assets in many different scenarios, not to mention the crucial aspect of fiduciary responsibility.”
The second group that Mathieson identifies includes smaller custodians, for whom DLT affords the opportunity to become more competitive on the global landscape as the need for a complex network management structure lessens. “While there are, so far, a few markets where DLT is likely to make that possible in the next few years,” says Mathieson, “we have seen quite a number of these banks gaining interest.” Their motivation is partly to understand how they can hold their assets directly on the registry, but they are also keen to engage in the “value-added” services that flow from that, such as securities lending, collateral management and the reuse of assets for margin management purposes, since those are the services that attract the higher margins.
Mathieson insists that the smart contracts underpinning transactions on a DLT platform are legally robust. “When we do our product development, we gather perspective from local counsel to make sure that our product design conforms to relevant law. The smart contracts simply replicate law as it is,” she says
Mathieson describes the third group as departments within the custody organisation which are attracted by the nature of the data enabled by a DLT platform. “That data is real-time, perfectly reconciled and risk auditable,” she says. “Custodians can rely on it to make credit decisions in the moment, to compile it across relationships as the transactions are happening. That allows for the creation of new risk management and data-enabled products.”
Over the past few years, says Mathieson, there has been an evident trend among transaction banks to combine investor services, securities services and corporate and investment banking. “What has not previously happened, and is now starting to happen, is that the operating risks across those businesses are starting to come together,” she says. As a result, securities services executives are, for example, assuming responsibility for markets operating risk and are looking for data to support their expanded role.