Investors turn to blockchain for post-trade efficiency
Proliferation of blockchain technology could have big consequences for Asia fund houses and institutional investors in the coming years, allowing these investors to improve how they access, retain and update their data in an fast yet orderly fashion.
“The low-hanging fruit is in post-trade services,” Sundeep Gantori, analyst and author of a UBS Wealth Management report on blockchain, told AsianInvestor. “When a stock exchange trade occurs, post-trade services such as settlement, custody, stock lending and collateral management can take 10 to 15 days to complete in several locations. With blockchain, reconciliation between parties could occur on a real-time basis or at the most, take up to two or three days.”
In simple terms, blockchain is a digitally distributed database, which is shared and continuously replicated. The technology generates a continuously growing list of records, called ‘blocks’, which are secured and linked using cryptography.
Blockchain enthusiasts believe the technology will, once widely adopted, revolutionise the way the world captures data and maintains records. They point out that the technology encourages disintermediation (by removing the need for a central record keeper), improves security (records are tamper-proof and immutable), increases resilience (there is no central point of failure) and lowers costs (by removing intermediaries).
“We estimate that blockchain could add as much as $300 billion to $400 billion of economic value globally by 2027,” Gantori's October report estimated.
Faster and cheaper
For buyside companies, real time reconciliation removes the need to invest in back offices and saves both time and costs. “This would free up bandwidth and potentially allow creation of new products and services,” Gantori added.
The reliance of the investment management industry on third-party services makes it well suited to adopt blockchain.
“A sales purchase agreement between an investor and fund manager, for instance, must be transferred to various third-party providers,” Jennifer Qin, Asia Pacific lead investment management partner and blockchain initiator at Deloitte China, told AsianInvestor. “These providers may be quite segmented, which can introduce inefficiencies in the system. Using blockchain can potentially eliminate these inefficiencies.”
Cutting inefficiencies reduces processing times and helps end-users such as individuals and institutional clients get an accurate view of their transactions more quickly. That is part of the reason why insurer AIA embraced blockchain in November for its Hong Kong bancassurance operations.
“Previously the process involved more labour intensive parallel systems that naturally led to longer wait times in things like processing customer policy purchases. We aim to turn this around in half the time it takes now,” said Ip Man Kit, chief technology and operations officer at AIA Hong Kong and Macau.
Other financial institutions agree. A growing list of wealth and asset managers, including BlackRock, Natixis, Bank of Singapore, Standard Chartered, Axa Investment Managers, BNP Paribas and Credit Suisse, are experimenting with or implementing DLT solutions in divisions including interbank payments, cross-border remittances and lending platforms, custody and settlement.
BNP Paribas Securities Services, for example, announced in April it was developing a blockchain-enabled digital fund distribution platform, and had partnered with Axa Investment Managers in the design phase of the project.
Similarly in November, Calastone, a global funds distribution and settlement network, announced it would migrate its core technology to blockchain in 2019.
Ken Tredigo, deputy CEO of Calastone, told AsianInvestor that his company estimated they could reduce European market fund trading costs by about 65% via blockchain’s reduced complexity and simplified processing.
Tech and wealth
The technology’s potential to cut costs particularly interest asset and wealth managers. Both industries have seen margins falling amid mounting competition and low cost investment solutions, even as compliance demands have risen (particularly in wealth management).
A Boston Consulting Group report on the global asset management industry released in July this year showed that in 2016, net revenues for the industry declined 1% from a year ago to $112 trillion, while costs remained flat at $119 trillion. Profits were squeezed by 2% to $99 trillion over the same period.
“From a fund distribution perspective, only a few can play the volume game; the alternative is to try something innovative on the distribution platform and see if that is sustainable,” said Kelvin Tan, DBS’s head of investment funds. “It’s also important to see what else can be done that makes commercial sense across the entire value chain.”
Tan’s views echo the sentiment of experts who believe that asset and wealth managers need to absorb new technology, or face extinction.
“If you don’t invest today in the right technology, your [company’s] value proposition will diminish in the long run,” Rene Buehlmann, head of Asia Pacific at UBS Asset Management, said at press briefing in Hong Kong in November.
He said the Swiss group is studying blockchain closely to see where it can be used most efficiently, adding that anything that can create efficiency in data storage is a big topic of discussion.
One particular area blockchain might help wealth managers is to beat back the compliance costs enveloping the industry as more rules get introduced. For example, wealth firms employ their own processes to learn about who their customers are and where their wealth is sourced from, a process called Know Your Client (KYC). It’s a laborious process, and investors wanting to shift to new institutions have to conduct it all again.
Blockchain-based KYC could potentially allow them to rapidly shift between institutions without having to do so—provided regulators allowed it.
“With DTL, banks can create digital identities, also known as hash codes, for their clients that can be used across platforms and institutions,” UBS’s Gantori noted.
This article is part of a longer report on blockchain technology and its potential impact on investors in Asia. Look out for the coming December 2017/January 2018 edition of AsianInvestor magazine for the full feature article.