Archive for the 'RegTech' Category

Barclays Bank call for standards for derivative trades on blockchain

Blockchain can revolutionize trading in derivatives, fix inefficiencies and cut cost of trading, but only if there is much more standardization across the industry. Barclays Bank is one of the key champions and yesterday (26 April) spoke out at the annual meeting of the International Swaps and Derivatives Association (ISDA) in Miami, USA.

According to this preview article on Coindesk: “Before banks and traders can rely on a distributed ledger technology as the vaunted ‘single record of truth,’ there first needs to be better standardization. Yet as it stands, they use a hodgepodge of data structures and formats to track the life cycle of trades, reflecting in part the variety of regulatory requirements imposed after the 2008 financial crisis.”

ISDA had proposed a common domain model (CDM) in May 2017, with the support of blockchain firms including R3, a consortium of the world’s biggest banks including JPMorgan and Citigroup among 200 enterprises, dedicated to researching and delivering new financial technology, and Axoni, a capital markets technology firm specializing in distributed ledger infrastructure.

ISDA is to release the first iteration of the blockchain-compatible version of CDM in early summer 2018 and Barclays has an internal CDM adoption working group. Coindesk quotes Sunil Challa from the business architect team at Barclays: “There is a shiny new technology promising to be a panacea for fixing many post-trade processing issues. So, now is an opportune moment to re-engineer our processes.”

“Simply replicating the existing fragmented state would be a colossal missed opportunity.”

How blockchain works for derivatives
Derivatives are traded using a contract between two or more parties, as highlighted in April 2016 on CNBC. Derivatives “contracts are made up of three main parts with ISDA creating the standards for derivative trading across the financial world. But the process is arduous with current paper contracts in the form of computer documents still being issued.”

Barclays showcased a prototype of using smart contracts through the lifecycle of a derivatives trade, including negotiating an ISDA master agreement, entering individual trades and performing the trades on a distributed ledger. The bank replaced traditional derivatives contracts with an electronic smart contract, whose fields could be pre-populated with certain values agreed by ISDA. This way, all the banks have the same document which will not vary slightly from bank to bank, something that can cause delays and unnecessary human intervention. The UK bank used a blockchain called Corda, developed by R3.

The banks involved could then populate the fields with the terms of the derivatives agreement such as the price with any changes being recorded. Those can then be seen online. Previously, a bank would have to search through its inbox or pile of documents to find an earlier version of the draft.

Even if banks use CDM on transactions between them, often they use their own ways to communicate data internally. CDM and distributed ledger could standardize data within institutions. It also provides a way for derivatives trading to be “blockchain agnostic” as many different providers are providing blockchain platforms and it is seen as risky to be on one.

Coindesk quotes Lee Braine of Barclays CTO Office, describing a future scenario in which banks are trading with each other on different distributed ledgers. If there are some counterparties on one network and other counterparties on other networks, would each need to host a node on every network or could they be genuinely interoperable? “A simplistic solution would be to revert to the traditional model of silos with messaging between them, but that risks replicating the fragmentation of the past. If you instead transition to the CDM, then at least there is opportunity to standardize on data structures, lifecycle events etc.”

Better for costs, better for regulators
Barclays working group estimated around 25% gains in efficiency form using CDM only in clearing, and about $2.5 billion in annual running costs.

Goldman Sachs, another keen supporter of CDM and shared ledgers as a way to deal with some of the extra pressures from implementing the European Union MiFID2 Markets in Financial Instruments Directive, which started being rolled out across financial institutions in the EU in January 2018.

One appeal for blockchain is that regulators can streamline reporting, by pulling data from a node on the blockchain. The Financial Conduct Authority of UK participated in a proof-of-concept for regulatory reporting of data mortgage transactions, using R3’s Corda platform.

According to Coindesk, Clive Ansell, head of market infrastructure and technology at ISDA, says: “There is a fantastic opportunity … but the level of success will depend on the industry operating to a common data and processing model.”

This article also appears at my new company website, www.innovation-wire.com.

Top learning on the future of African exchanges – BAFM seminar this week 19-20 April

The 7th Building African Financial Markets (BAFM) seminar has a top lineup and tomorrow (17 April) is the last day to register The seminar is part of the annual programme of capital markets development and synergies of the African Securities Exchanges Association and is also backed by the World Federation of Exchanges. It is hosted by Nairobi Securities Exchange, will be on 19-20 April at the Villa Rosa Kempinski Hotel in Nairobi.

Leading the programme will be William Ruto (Deputy President of Kenya), Geoff Odundo (CEO, Nairobi Securities Exchange), Samuel Kimani (Chairman of the Nairobi SE), Oscar Onyema (President of ASEA and CEO of the Nigerian Stock Exchange), Paul Muthaura (CEO of the Capital Markets Authority of Kenya).

Topics are focused on market structures, innovation, new technology and linkages, including top international speakers:

• Adaptive innovation and the blueprint for orderly markets in Africa – Siobhan Cleary (Head of Policy and Research, World Federation of Exchanges) and Stebbings Archie (Principal, Oliver Wyman)
• Building blocks for innovative markets: effective risk management for clearing and settlement, a CCP in a box – Stuart Turner (Founder, Avenir Technology)
• Building new markets in a frontier economy and the impact on indigenized solutions: The Kenyan experience – Terry Adembesa (Director, Derivatives Markets, Nairobi SE)
• Linking African exchanges organically – Selloua Chakri (Managing Director, SCL Advisory)
• Building blocks for innovative markets: A guide for managing cyber risk – Joseph Tegbe (Partner and Head of Technology Advisory at KPMG, Nigeria)
• FinTech as an enabler for sustainable development: An innovation showcase – Panel with moderator Catherine Karita (Executive Director at NIC Securities), Farida Bedwei (Co-Founder and Chief Technical Officer, Logiciel Ltd), David Waithaka (Chief Strategist at Cellulant Kenya), Candice Dott (Head of Market Development and Customer Experience across Africa, Thomson Reuters), Alex Siboe (Head of Digital Financial Services at KCB Bank Kenya) and Julianne Roberts (F3 Life)
• RegTech: Leveraging technology in the effective risk management and regulation of African capital markets – Michele Carlsson (Managing Director, Middle East and Africa, Nasdaq)
• Effective financial education: The role of emerging technology in contemporary Africa – Abimbola Ogunbanjo (Managing Partner, Chris Ogunbanjo & Co.)
• Financial innovations in SME financing: Opportunities for African MSMEs – Sofie Blakstad (CEO, Hiveonline)
• Disruptive technologies reshaping the future of African financial markets: M-Akiba – Irungu Waggema (Head of IT, Nairobi Securities Exchange)
• Impact of EU Regulation on African Capital Markets (EMIR, BMR, MIFID II, GDPR) – Anne Clayton (Head of Public Policy, Johannesburg Stock Exchange)
• Financing sustainable development: Product and market innovations – Anthony Miller (Coordinator at the Sustainable Stock Exchange Initiatives)
• Disruptive technologies: Blockchain – the future of finance or a flash in the pan? – panel with moderator Ade Bajomo (Executive Director, Information Technology and Operations, Access Bank), Reggie Middleton (CEO and Founder of Veritaseum), Abubakar Mayanja (MD of ABL), Adriana Marais (Head of Innovation SAP Africa) and Samuel Maina (Research Scientist at IBM Research Lab Africa)

It’s a key gathering for Africa’s securities exchanges and key learning for all interested in the future of capital markets and their role in African development. For more information and for bookings, rush to this registration link.