SmartStream assembles new innovation team to streamline ‘fractured’ post-trade processes

SmartSteam’s head of strategy outlined ambitious plans for post-trade processes including streamlining and a rebranding of reconciliation.

By Jonathan Watkins

SmartStream is aiming to streamline post-trade processes with a new team of mathematicians, applied data scientists and computer scientists based in Vienna, while also eyeing a new innovation office in Cambridge.

The new team in Vienna will be using artificial intelligence (AI), machine learning and blockchain technologies in the areas of reconciliations, cash management and fees and expense management.

Speaking to Global Custodian, Darryl Twiggs, head of strategy at SmartStream, outlined the tech provider’s ambitious plans using AI and machine learning, and said he sees distributed ledger technology one day creating a single stream of post-trade processes.

“Lots of back-office post-trade processing is fractured, there are multiple systems, multiple major infrastructures and they are separate with different teams,” Twiggs explained. “Blockchain gives us the ability to streamline and automate these.

“Take collateral, you have the collateral deal, you have to calculate initial margin, margin transfer, calculate your variation margin every day, do a valuation every day. Those are all today different services on different systems. We would see a clear blockchain support channel which means a single stream.”

Reconciliation rebrand

One area Twiggs said he can see a major restructuring with new technologies is reconciliation.

Efficiencies and cost reductions in reconciliation are one of the major proposed benefits of blockchain, according to many pilots and proof of concepts.

At the end of May, Commerzbank instantaneously replicated an FX forward using blockchain in a trade with German industrial group, ThyssenKrupp.

The successful use of blockchain eliminated the need for transaction reconciliation, as the trade was stored as a single immutable record.

According to Twiggs however, reconciliations will not disappear but more likely be thought of under the new name off ‘assurance’.

“The banking industry needs reconciliations because there are errors when the data is entered by the trader, there are errors in the reference data, securities information, the FX rates, the fees and expenses,” said Twiggs. “Those errors will not be eliminated by blockchain technology, they will occur.

“Reconciliations and the whole cleaning up of the process will move from what is now post-settlement – where most of it happens today – to post-trade, so before they publish and broadcast that trade they would have to do validation.

“There will have to be more projects to clean up data. Reconciliations could move to a different part of the chain, but then there’s an assurance, perhaps the word could change from reconciliation to ‘assurance’.”

Reputational risk problems

It is estimated that some investment banks have as many as 3,000 people doing reconciliation, a process primed for automation through new technologies.

Part of the revamp of the Australian Securities Exchange (ASX) is a new equity post-trade system based on blockchain technology is also aimed at reduced reconciliation.

Around 18 months ago, blockchain specialists SETL and Cobalt DL also teamed up to produce a post-trade tool for foreign exchange, with 15 leading institutional FX participants already signed up. At the time, SETL said the immutable record would obviate reconciliation problems.

Twiggs says the use of blockchain for reconciliation would bring a question of whether the new technology would warrant putting out errors onto a distributed ledger.

“Banks now have to ask themselves, do I just continue and put the bad transaction out so everyone sees it? That could bring reputational risk problems.”