BNP Paribas Asset Management and its sister Securities Services business have completed a full end-to-end fund transaction test using Blockchain technology, putting the firm in the front row for custodians when the ASX becomes – probably – the first exchange in the world to adopt distributed ledger technology later this year.
The test in Europe was conducted using BNP Paribas Securities Services’ ‘Funds Link’ and ‘FundsDLT’ Blockchain platforms, which were developed alongside the Luxembourg Stock Exchange’s Fundsquare, InTech and KMPG Luxembourg, according to ‘Global Custodian’ newsletter.
The test demonstrated Fund Link’s ability to connect with other Blockchains, marking a milestone for fund distribution from delivery of the order to the processing of the trade.
Luc Renard, Sydney-based head of corporates and financial intermediaries for BNP Paribas Securities Services in APAC, said last week that the development meant that the firm would use the new system to settle transactions with counterparties on behalf of clients.
“We are basically the users of this new system as we were the users of the CHESS system,” he said. ASX is looking to replace CHESS, although a final decision has not yet been made.
“It also means that we will be using a system built with more recent technology and we will have to interface with it. ASX is likely to offer different ways to interface with the system. We could simply send standard messages (ISO 20022) to ASX, or we may interact more closely with the distributed ledger technology (DLT) by installing it – often referred as ‘installing a node’ – in our premises,” Renard said.
He said: “As we do not have the day-one functionality confirmed yet – ASX being expected to confirm this in March – it may be a little early to fully predict the benefits to our clients and the market in general. That being said, from our work with ASX and Digital Asset, we expect a solution that will improve end-to-end automation of settlement flows, provide a fully automated corporate actions announcement, election and payment process, allow for investors to choose their optimum market account structure to suit their needs and support greater optionality when it comes to things like settlement cycles and funding currencies.”
Digital Asset is the US-based DLT developer in which ASX and several global banks have invested, which is likely to deliver the first working Blockchain system for the world market.
Renard said ASX had stated all along that they were designing the solution with the needs of investors at the forefront of their vision. Institutional investors would be interested to see the final day-one scope to analyse how it could allow them to optimise their trading strategies and funding models as well as how their providers could interact with ASX to provide them with the available data in the quickest timeframe, he said.
“It is important, therefore, that investors are fully aware of the coming changes so they can prepare for the enhancements and to ensure that they see the maximum benefit as soon as possible post the initial implementation.”
The changes ahead will likely lead to innovation in new products being available to investors, opening up further offerings and the potential for further offshore investment into Australia. This should provide the opportunity to challenge the inefficiencies in the end-to-end value chain and the removal of redundant processes.
Both BNP’s Renard and the ASX have said that they do not envisage any additional risk created by the DLT environment.
The migration timetable for the ASX will be clarified in the next phase of its project, probably by the end of March.
Renard said that one of the many advantages of the new technology was that, in time, it would improve cross-border trades and settlements.
“Cross-border and cross-market settlement requirements can be complex, costly and confusing to investors and their service providers,” he said. “Also, it is important to acknowledge that the specific requirements for settlement vary from market to market. This is one reason we have implemented our ‘Augmented Custody’ solution across our proprietary network to add additional standardisation of setup and requirements to our proprietary network. This process works well as a precursor to market technology change like the proposed development from ASX.”
He said: “The CHESS replacement solution positions ASX as a “first mover” into the DLT space for their post-trade technology. It is likely that other markets will follow suit over time (potentially using Digital Asset’s solution). If this is the case, it should benefit the cross-border trading model between the impacted markets greatly.”
BNP Paribas has invested in three companies for which Blockchain is a key technological component:
. Digital Asset Holdings, which is the technology provider for the ASX project
. R3, which is developing the Corda protocol and is exploring numerous use case of Blockchain within the financial industry, and
. Liquidshare which focus on developing a new market infrastructure for SMEs shares in Europe.
BNP Paribas has also gone through the process of training staff to the new technology and creating a “Blockchain centre of competence” with IT specialists. This started in 2011 when the custodian bank started to look at the technology in research and development teams.
Large training sessions started in 2014, when the first BNP Paribas “Biz Hackathon” on Blockchain was organised. The project gathered 40 BNP Paribas staff with 10 Blockchain experts and 10 facilitators to explore the technology and define pilot projects.
Greg Bright is publisher of Investor Strategy News (Australia)