Panelist left to right: Artem Korenyuk, Hyder Jaffrey and Dr. Lee Braine.
At the DTCC European Client Forum, industry experts debated regulatory forces in tandem with technical innovation, and asked whether distributed ledger technology (DLT) removes a much-needed central point of control. Held in November at the East Wintergarden in London, the Forum brought together industry leaders to engage in important dialogue on current and emerging issues and trends around the post-trade space.
Speakers on the panel “DLT: Is the Role of Governance a Misnomer?” raised important issues between those involved in regulation and others rolling out fintech innovation. More specifically, how firms will engage most effectively, with stakeholders, in the coming year, during this period of unprecedented, but exciting, disruption.
Valentino (Val) Wotton, DTCC Managing Director of Product Development and Strategy, Derivatives and Collateral Management, moderated the panel of four experts to explore these matters: Dr. Lee Braine of the Chief Technology Office at Barclays; Hyder Jaffrey, Head of Strategic Investment and Fintechat UBS Investment Bank; Richard Cohen, Senior Associate at UK law firm Allen & Overy, and Artem Korenyuk, DTCC Director of Business Development and the Office of FinTech Strategy.
Decentralized vs. Control
Wotton opened the floor with the question: “Are we at the peak of where we think DLT is going to be from a hype perspective?” and suggested the panel start by going back to basics: “Why is DLT out there and being seen as an important technology?”
Jaffrey addressed the key issue behind DLT - the removal of key insight due to its decentralized nature. “The technologies of today are built around centralized models,” he said. “Somebody has to be there as the administrator, the owner, the person who’s running and administrating. But the distributed DLT models are very much around taking out that point of control.”
Clearing Regulatory Hurdles
Cohen, a UK securities lawyer, sees opportunities for decentralized technologies, but is aware of the regulatory hurdles which still need to be cleared. “One of the things I’m probably most focused on is the use of blockchain in the securities space – and how it can effectively facilitate easier secondary market, easier primary issuance and an easier secondary market with and trading peer-to-peer,” he said.
He believes there are significant gains to be had in facilitating peer-to-peer transactions without a lot of the current infrastructure interface. But, he noted that current regulation in Europe, which governs central securities depositories, goes against the objectives blockchain is currently a restriction on some of these developments. “I think it’s a promising area but there are some fairly substantial regulatory hurdles to overcome,” he said.
Re-platforming for the Future
Introducing DTCC’s perspective, Korenyuk gave an update on the re-platforming of the Trade Information Warehouse (TIW), which delivers a variety of different services including asset servicing, managing the trade lifecycle, netting and facilitating payment onto a distributed ledger with multiple nodes. This is a massive undertaking and leverages cloud-computing and warehousing in partnership with Axoni, IBM and R3.
Wotton pointed out that the TIW re-platforming is no longer a proof of concept and Korenyuk agreed, offering a time stamp on development. “We’re looking to go live into production in early 2019. It’s not just sharing data or outputs on a ledger. It’s actually programming to the point around business models; programming the lifecycle of a trade into a smart contract that allows you to process data as opposed to just share data.”
All panelists agreed that the way forward depends on taking the best of distributed technology (openness, speed to market, innovative technology and business models), with appropriate governance, to ensure safety and client trust, as long as the market didn’t devolve into a morass of fragmented infrastructure.
DFMI & Interoperability
One solution to this was offered by UBS’s Jaffrey. He mentioned the “DFMI”, a new form of FMI which still needs to comply with the Principles for Financial Market Infrastructures (PFMI), with all the appropriate controls: “The innovation is that a DFMI is a distributed FMI,” he explained. “Watch out for that particular phrase because I think you’ll see it more and more.”
Speaking on behalf of Barclays, which manages assets over 1.133 trillion UK Pounds Sterling, Dr. Braine said he thought there was a big issue on the horizon because a lack of interoperability could lead to increased fragmentation.
“When you look at the different distributed ledger platforms, you see they have different ways of operating under the hood and different ways of communicating,” said Dr. Braine. “I think we’re inevitably going to have silos, and some of those silos won’t necessarily be via product or asset class.
“They’ll unfortunately be embedded around different DLT platforms that cannot fully interoperate with each other for technical reasons,” he added. “The risk is that the potential benefits of shared ledgers and tokenization will be diluted because different platforms won’t be able to construct messages that allow them to communicate the full richness of what they need to communicate. We need to raise this as a high priority for the industry and, for next year, there should be a focus on determining how to get the different DLT platforms interoperating.”
Further fragmentation in an industry which is struggling to reduce costs is a major concern for all, agreed the panelists.
“There will certainly be multiple ledgers,” pointed out DTCC’s Korenyuk, “But as soon as you introduce messaging, you have a terribly expensive and inefficient database of today. You need to reintroduce reconciliation.”
Based on some of the research that DTCC’s conducted, Korenyuk noted there is no elegant or efficient solution today.
As the panel wrapped up its discussion, all concurred that technology has a long tradition of transforming financial services, but appropriate controls and regulations need to be in place to ensure that clients are getting maximum value, in a secure environment. DLT is a fundamental enabler of industry change. Coupled with other emerging technologies, including automation, AI, robotics, machine learning and cloud-computing, it will continue to evolve, but, all the panelists agreed, interoperability is key, when leveraging new distributed platforms without the traditional forms of control built in.