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An ambitious look at how blockchain can reshape financial services
An Industry Project of the Financial Services Community | Prepared in collaboration with Deloitte
Part of the Future of Financial Services Series • August 2016
Foreword
Consistent with the World Economic Forum’s mission of applying a multistakeholder approach to address issues of global impact,
creating this report involved extensive outreach and dialogue with the Financial Services Community, Innovation Community, Technology
Community, academia and the public sector. The dialogue included numerous interviews and interactive sessions to discuss the insights
and opportunities for collaborative action.
Sincere thanks to the industry and subject matter experts who contributed unique insights to this report. In particular, the members of
this Financial Services Community project’s Steering Committee and Working Group, who are introduced in the Acknowledgements
section, played an invaluable role as experts and patient mentors.
We are also very grateful to Deloitte Consulting LLP in the US, an entity within the Deloitte1 network, for its generous commitment and
support in its capacity as the official professional services adviser to the World Economic Forum for this project.
Contact
For feedback or questions:
R. Jesse McWaters, Lead Author
jesse.mcwaters@weforum.org
+1 (212) 703 6633
1Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their
related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide
services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms. Please see www.deloitte.com/us/about for a
detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations
of public accounting.
This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax,
or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision
or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional
advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.
WORLD ECONOMIC FORUM | 2016 2
The Distributed Ledger Technology project is the most recent phase of the Forum’s
ongoing Disruptive Innovation in Financial Services work
2015 2016
THE FUTURE OF FINANCIAL SERVICES BEYOND THE FUTURE OF FINANCIAL SERVICES
The Future of Financial Services project explored the landscape This phase of the disruptive innovation work explores two topics
of disruptive innovations in financial services, provided the first with key potential as foundational enablers of future disruption
consolidated taxonomy for these disruptions, and explored their
potential impacts on the structure of the industry The future of financial infrastructure: An ambitious look at how
blockchain can reshape financial services
This project explores the potential
for distributed ledger technology
to transform the infrastructure of
the financial services industry
A Blueprint for Digital Identity: The Role of Financial Institutions
in building Digital Identity
This project explores the potential
for digital identity in financial
services and beyond and lays out
a blueprint for the
implementation of effective digital
identity systems
WORLD ECONOMIC FORUM | 2016 3
Contents
Acknowledgements.......................................................................................................................................................................................... 5
Executive Summary
Context and Approach….…………………..…………………………………………………………………………………………………………………………………………………. 13
Key Findings..………………………………………………………………………………………………………………………………………………………………………………………. 17
Use Case Deep‐Dives
Approach….…………………………………………………………………………………………………………………………………………………………………………………………. 32
Summaries….………………………………………………………………………………………………………………………………………………………………………………………. 37
Modules
Payments: Global Payments......................................................................................................................................................................................... 46
Insurance: P&C Claims Processing................................................................................................................................................................................ 56
Deposits and Lending: Syndicated Loans...................................................................................................................................................................... 65
Deposits and Lending: Trade Finance........................................................................................................................................................................... 74
Capital Raising: Contingent Convertible (“CoCo”) Bonds............................................................................................................................................. 83
Investment Management: Automated Compliance..................................................................................................................................................... 92
Investment Management: Proxy Voting....................................................................................................................................................................... 101
Market Provisioning: Asset Rehypothecation............................................................................................................................................................... 110
Market Provisioning: Equity Post‐Trade....................................................................................................................................................................... 119
Contact Details................................................................................................................................................................................................. 128
WORLD ECONOMIC FORUM | 2016 4
Section 1
Acknowledgements
WORLD ECONOMIC FORUM | 2016 5
Acknowledgements
Members of the Steering Committee
The following senior leaders from global FIs provided guidance, oversight and thought leadership to the Future of Financial Services
series as its Steering Committee:
WORLD ECONOMIC FORUM | 2016 6
Acknowledgements
Members of the Working Group
The project team would also like to acknowledge the following executives of global FIs who helped define the project framework and
shape strategic analyses as its Working Group:
Lena Mass‐Cresnik, PhD Justin Pinkham
Head, Innovation, Strategic Product Senior Business Leader, Strategic Initiatives,
Management, BlackRock MasterCard
WORLD ECONOMIC FORUM | 2016 7
Acknowledgements
List of subject matter experts
In addition, the project team expresses its gratitude to the following subject matter experts who contributed their valuable perspectives
through interviews and workshops (in alphabetical order):
WORLD ECONOMIC FORUM | 2016 8
Acknowledgements
List of subject matter experts (cont.)
In addition, the project team expresses its gratitude to the following subject matter experts who contributed their valuable perspectives
through interviews and workshops (in alphabetical order):
WORLD ECONOMIC FORUM | 2016 9
Acknowledgements
List of subject matter experts (cont.)
In addition, the project team expresses its gratitude to the following subject matter experts who contributed their valuable perspectives
through interviews and workshops (in alphabetical order):
Rocky Scopelliti Telstra
Angus Scott Euroclear
Sabrina Sdao Deloitte Canada
Anton Semenov Commerzbank AG
Beth Shah Digital Asset Holdings
Rajesh Shenoy Citi
Makoto Shibata Bank of Tokyo‐Mitsubishi UFJ
Matthew Spoke nuco
Elizabeth Stark Lightning Network
Maxwell Sutton Reserve Bank of Australia
Paul Szurek Blockchain
Michael Tang Deloitte Canada
Don Tapscott The Tapscott Group
Alison Tarditi Commonwealth Superannuation Corporation
Simon Taylor 11:FS
Adizah Tejani Level39
Craig Tillotson Faster Payments
Keith Tippell SWIFT
Marcus Treacher Ripple
Alan Tse Commonwealth Treasury
Hedi Uustalu Nasdaq
Peter Vander Auwera SWIFT
Wayne Vaughn Tierion
Chris Wasden Univerity of Utah
Casey Wilcox Paretix
Shane Williams UBS
Greg Williamson JPMorgan Chase & Co.
Jeremy Wilson Barclays
Lawrence Wintermeyer Innovate Finance
Jerry Yohananov SocietyOne
Tom Zschach CLS Bank
WORLD ECONOMIC FORUM | 2016 10
Acknowledgements
Project team and core team
Project Team Core Team
The “The future of financial infrastructure: An ambitious look at The World Economic Forum expresses its gratitude to the
how blockchain can reshape financial services” project team following individuals on the project core team from Deloitte for
includes the following individuals: their contribution and support throughout the project:
WORLD ECONOMIC FORUM | 2016 11
Section 2
Executive Summary
WORLD ECONOMIC FORUM | 2016 12
Section 2.1
Context and Approach
WORLD ECONOMIC FORUM | 2016 13
Distributed ledger technology (DLT), more commonly called “blockchain”, has captured
the imaginations, and wallets, of the financial services ecosystem
24+ countries currently
Global
investing in DLT
interest
Research Bank
2,500+ patents filed over experimentation
80% of banks predicted to
the last 3 years initiate DLT projects by 2017
Consortium Venture
efforts DLT activity capital
90+ corporations have joined Over US$ 1.4 billion in
blockchain consortia investments over the past 3 years
Central
banks
90+ central banks engaged
in DLT discussions worldwide
Awareness of DLT has grown rapidly, but significant hurdles remain to large‐scale implementation
WORLD ECONOMIC FORUM | 2016 14
This report aims to complement existing distributed ledger technology research by
providing a clear view into how financial service functions can be reimagined
Top‐down approach Bottom‐up approach
Address pain‐points within select Identify transformative potential
financial service functions across all financial service functions
The potential for future
Solution‐first methodology Problem‐first methodology approaches will be explored at
Identify current‐state issues and envision Understand business domains drive
the conclusion of
future‐state through DLT capabilities adoption of DLT capabilities
Section 2: Executive summary
Technology focus Business‐process focus
Position advances as having significant Question orthodoxies and accept that
disruptive impact to business models DLT is one of many available tools
NOTE: Please reference Section 3: Use case deep‐dive approach to learn
WORLD ECONOMIC FORUM | 2016 more about our underlying focus and assumptions across our analysis. 15
This analysis was based on over 12 months of research, engaging industry leaders and
subject matter experts through interviews and multistakeholder workshops
Global workshops
Five multistakeholder workshops at global financial hubs, with 200+ total participants, including
industry leaders, innovators, subject matter experts and regulators
WORLD ECONOMIC FORUM | 2016 16
Section 2.2
Key Findings
WORLD ECONOMIC FORUM | 2016 17
1 2 3 4 5 6
The World Economic Forum’s analysis has yielded six key findings regarding the
implications of distributed ledger technology (DLT) on the future of financial services
Key findings
DLT has great potential to drive simplicity and efficiency through the establishment of new financial services infrastructure
1
and processes
DLT is not a panacea; instead it should be viewed as one of many technologies that will form the foundation of next‐
2
generation financial services infrastructure
3 Applications of DLT will differ by use case, each leveraging the technology in different ways for a diverse range of benefits
The most impactful DLT applications will require deep collaboration between incumbents, innovators and regulators, adding
5
complexity and delaying implementation
New financial services infrastructure built on DLT will redraw processes and call into question orthodoxies that are
6
foundational to today’s business models
These key findings are explored in depth in the following pages, based on the use case deep‐dives conducted across financial services.
WORLD ECONOMIC FORUM | 2016 18
1 2 3 4 5 6
Distributed ledger technology has great potential to drive simplicity and efficiency
through the establishment of new financial services infrastructure and processes
The following six key value drivers for DLT were identified through the in‐depth examination of nine use cases from across financial
services.
Value drivers
Operational simplification
1
DLT reduces / eliminates manual efforts required to perform reconciliation and resolve disputes
Regulatory efficiency improvement
2
DLT enables real‐time monitoring of financial activity between regulators and regulated entities
Counterparty risk reduction
3 DLT challenges the need to trust counterparties to fulfil obligations as agreements are codified and executed in a shared,
immutable environment
Clearing and settlement time reduction
4
DLT disintermediates third parties that support transaction verification / validation and accelerates settlement
Liquidity and capital improvement
5
DLT reduces locked‐in capital and provides transparency into sourcing liquidity for assets
Fraud minimization
6
DLT enables asset provenance and full transaction history to be established within a single source of truth
WORLD ECONOMIC FORUM | 2016 19
1 2 3 4 5 6
Distributed ledger technology is not a panacea; instead it should be viewed as one of many
technologies that will form the foundation of next‐generation financial services infrastructure
Over the last 50 years, technology innovation has been fundamental to financial services industry transformation. Today, multiple
technologies poised to drive the next wave of financial services innovation are converging in maturity.
Mainframes
Terminals
Biometrics
networks
Internet
and PCs
devices
Mobile
Smart
Local
Cloud computing
Cognitive computing
Distributed ledger
technology
Machine learning /
Allowed the Enabled batch Automated Enabled data Facilitated the Created a new Spearheaded predictive analytics
replacement of overnight banks centres, global exchange of medium to interact frictionless
physical recording processing and branches intranets data and enabled a with clients and payments Quantum computing
by digital data and facilitated and corporate series of collect data
offline remote systems international Robotics
banking businesses
DLT is one of many transformative new
Credit Messaging ATMs Electronic Digital
technologies that will shape future financial
cards services (e.g. SWIFT) trading banking
services infrastructure and should be seen as
part of a toolbox
WORLD ECONOMIC FORUM | 2016 20
1 2 3 4 5 6
Applications of distributed ledger technology will differ by use case, each leveraging the
technology in different ways for a diverse range of benefits
Examples of DLT value drivers
and benefits
Trade Enables real‐time multi‐party tracking and management of
Operational simplification
finance letters of credit, and enables faster automated settlement
Enables the near real‐time point‐to‐point transfer of funds
Global
Settlement time reduction between financial institutions (FIs), removing friction and
payments accelerating settlement
WORLD ECONOMIC FORUM | 2016 21
1 2 3 4 5 6
Digital Identity is a critical enabler to broaden applications to new verticals; Digital Fiat
(legal tender), along with other emerging capabilities, has the ability to amplify benefits
laundering (AML) and know‐your‐client
(KYC) processes
tokens issued by a central bank
• Elimination of the need for an inefficient
?
The potential benefits of these integrations
• Seamless customer onboarding bridge between cash and new financial
are highly uncertain
• Improved counterparty matching infrastructure
WORLD ECONOMIC FORUM | 2016 22
1 2 3 4 5 6
The most impactful DLT applications will require deep collaboration between
incumbents, innovators and regulators, adding complexity and delaying implementation
Updating financial infrastructure through DLT will require significant time and investment. Three key observations must be taken into
consideration for this implementation to be successful.
Key observations and insights
Replacing existing financial
infrastructure by DLT will Aligning key stakeholders for
require significant time and collective action will require
investment Infrastructure Competing difficult balancing of interests in
replacement interests the face of diverging interests
and zero‐sum games
Achieving all three key observations will
Implementing new financial infrastructure will delay large‐scale, multi‐party DLT
require changes to existing regulations, implementations in highly regulated
standards of practice, and the creation of new Legal, regulatory and markets. However, if successful, these
legal and liability frameworks. Specifically, the governance frameworks could enable scalable infrastructure
implementation of smart contracts will fabrics, industry‐wide solutions and
require additional stakeholder alignment and standardized processes
governance considerations
WORLD ECONOMIC FORUM | 2016 23
1 2 3 4 5 6 a b c
New financial services infrastructure built on DLT will redraw processes and call into
question orthodoxies that are foundational to today’s business models
Assumptions that are central to today’s financial business models will be impacted both intentionally and unintentionally by the shift to
distributed financial infrastructure, requiring incumbents to adjust their business practices in response.
Information silos drive the need for detailed
reconciliation activities
a) immutability
Lack of a single version of the truth and audit Eliminates need for Provides historical single
trails creates arbitrage concerns reconciliation version of the truth
Asymmetric information between market
participants drives the proliferation of
central authorities b) transparency Eliminates imbalance of Increases cooperation
Lack of transparency increases regulations on information among market between regulators and
FIs participants regulated entities
Lack of trust between counterparties creates
the need for central authority oversight in c) autonomy Ensures agreements are Disintermediates supporting
contract execution executed to agreed upon entities established to
business outcomes resolve disputes
WORLD ECONOMIC FORUM | 2016 24
1 2 3 4 5 6 a
Distributed ledger technology will question the need for individual books of record
through immutable and distributed record‐keeping
DLT provides transaction immutability, which is a key requirement for eliminating the need for an enforcer of trust in the ecosystem.
Tamper‐proof distributed data enables an environment in which trust is not an issue and allows counterparties to operate with a single
version of the truth.
Current state
Traditionally, asset and transaction information was stored within physical books to independently reference previous actions internally
and externally. As technologies advanced, physical books were translated into digital ledgers
Today, every FI maintains its own digital “book of record” repository
As a result, central intermediaries proliferate in the industry, providing unbiased reconciliation services to facilitate transactions between
counterparties without requiring them to trust each other. For transactions executed internal to the organization, reconciliation is
performed within lines of businesses
DLT transformative potential Financial services implications
At its core, DLT is a growing repository of transactions Challenges information silos between market
organized in chronological blocks where the technology participants and eliminates the need for inter‐firm
intrinsically makes changes to previous transactions reconciliation
functionally impossible
Disintermediates central intermediaries and reduces the
fear of arbitrage within the ecosystem
DLT has been designed to replicate data among
participating nodes in real time, ensuring all parties
operate off of a single version of the truth at all times Enables audit trails to be established for assets and
transactions with a significant reduction in disputes
WORLD ECONOMIC FORUM | 2016 25
1 2 3 4 5 6 b
Distributed ledger technology will significantly increase transparency between market
participants
Infrastructure must be capable of sharing information among all market participants. DLT builds upon a single version of the truth to
provide transparency for historical and real‐time transactions.
Current state
The age and fragmentation of large parts of existing financial infrastructure have placed limits on the degree of transparency these
systems are able to offer, creating opportunities for information asymmetry
As a result, some actors within the ecosystem have gained competitive advantages through the imbalance of information
While some entities profit from this state of information, others experience suboptimal performance and spend excessive resources on
risk hedging and liquidity guarantees
DLT transformative potential Financial services implications
The “default setting” of DLT is to provide full Challenges existing competitive advantage models that
transparency into transactions leverage information asymmetry
DLT has the potential to transform existing notions of Reduces the role of supporting entities (e.g. insurers)
private records, in which transaction details are only that profit from opacity within the ecosystem
known to counterparties
DLT can promote the creation of a public record of Promotes discourse in the ecosystem where
activity in the ecosystem to which all market participants transparency best serves market participants vs where
have access in real time opacity is needed (e.g. secure personally identifiable
information data)
WORLD ECONOMIC FORUM | 2016 26
1 2 3 4 5 6 b
Distributed ledger technology will have implications for the cost of leverage by reducing
information asymmetry between borrowers and lenders
DLT enables improved visibility into the ways in which assets are being employed through the tokenization of assets and a public record
of transactions.
Current state
In a wide variety of transactions types, FIs may loan or pledge assets to provide or receive access to credit; however, limited visibility
exists into how many times an asset has been loaned or pledged
This limited line‐of‐sight into liens against an asset enables that asset to be used to secure multiple debts by the borrowers, often in
excess of nominal asset value
This opacity causes lenders to rely upon reputational factors and assessments by supporting entities such as rating agencies
DLT transformative potential Financial services implications
DLT can tokenize individual assets (e.g. property and Promotes visibility of assets and associated
bonds) on a shared and trusted ledger to establish liens/ownerships to quantify risk and increase pricing
provenance accuracy
Reduces access to capital for borrowers by limiting the
ability to use the same asset to secure leverage from
DLT can provide visibility into assets and associated multiple parties
liabilities based on transactional history while increasing
the efficiency of credit transactions Challenges the role of rating entities in quantifying risks
WORLD ECONOMIC FORUM | 2016 27
1 2 3 4 5 6 b
Distributed ledger technology will transform the relationship between regulators and
regulated entities, reducing frictions and improving outcomes
Transactional data must provide granularity and accuracy to regulators in order to monitor and comply with regulatory obligations. DLT
facilitates transparency between regulators and regulated entities through a shared repository with real‐time access to data.
Current state
Regulated entities and regulators are increasingly challenged to support information requirements to certify compliance
While regulated entities are committed to enable transparency, significant costs and risks are associated with current systems and
business processes
As complexity within the ecosystem and financial instruments increases, the trade‐off between transparency and cost becomes a
balancing act
DLT transformative potential Financial services implications
DLT can become a shared data repository between Transforms compliance from post‐transaction
regulators and regulated entities, breaking down monitoring to on‐demand and immediate monitoring
organizational silos
Improves capability of regulators to fulfil their mandate
DLT has the potential to allow subsets of transactional of ensuring the legality, security and stability of financial
data to be effortlessly shared with regulators in real‐time markets
Improves efficiency for regulators to monitor trading
DLT can facilitate ‘regulatory‐inclusive’ business models, venues such as over‐the‐counter markets and dark pools
in which regulators utilize smart contracts to verify
Reduces regulatory compliance costs significantly
transactions / deals in real‐time
WORLD ECONOMIC FORUM | 2016 28
1 2 3 4 5 6 c
Distributed ledger technology will reduce the need for intermediaries by providing
autonomous execution capabilities
Financial agreements are enforced via a complex set of business rules and processes to ensure obligations are fulfilled by counterparties.
DLT provides the ability to autonomously execute these conditions in a shared and trusted environment.
Current state
All transactions involving at least two market participants are governed by agreements that highlight business outcomes based on
obligations that must be met by each counterparty
The responsibility for ensuring these agreements are enforcements dependent on legal and regulatory frameworks
As a result, the complexity of these agreements has given rise to intermediaries that mediate disputes between parties and resolve
deviations within agreed upon outcomes
DLT transformative potential Financial services implications
DLT can codify financial agreements in a shared platform Reduces counterparty risk due to the reduced need to
and guarantee execution based on mutually agreed trust counterparties’ willingness or ability to fulfil
conditions, limiting unilateral counterparty actions obligations
Disintermediates entities that currently mediate
disputes and resolve business outcomes
DLT can eliminate the manual effort required to support
the execution of financial agreements and can accelerate
business outcomes
WORLD ECONOMIC FORUM | 2016 29
Additional research remains to assess distributed ledger technology feasibility, quantify
benefits and analyze implementation details
Important questions to be answered moving forward
• Cost‐benefit analyses need to be conducted to determine the financial viability of distributed ledger technology
• Roadmaps need to be developed to achieve market participant collaboration and establish standards
• Governance models, backed by societal‐level discussions, need to be envisioned to support technology accountability
• Regulatory, legal and jurisdictional‐specific tax frameworks need to be established and well‐understood
To conclude our executive summary, the following page will expand on our approach and help navigate across our use case deep‐dives.
NOTE: Please reference Section 3: Use case deep‐dive approach to learn
WORLD ECONOMIC FORUM | 2016 more about our underlying focus and assumptions across our analysis. 30
This report provides comprehensive, business‐process‐level views of distributed ledger
technology implementations within each financial services function
This report’s detailed findings are designed to be consumed according to business affinity and interest. The table below shows the
location of each use case, which can be read independently of each other.
Context and Approach
1 An overview of current global DLT activity and the analysis methodology
Executive Summary
2 A summary of the use case deep‐dives through six key findings
Use Case Deep‐Dive Approach
3 An introduction of selected use cases, the analysis structure and high‐potential use case characteristics
Use Case Deep‐Dive Summaries
4 A summary of the key findings of each use case organized by financial services function
Use Case Deep‐Dive Modules
Nine business‐process‐level analyses of a use case’s current state and transformed future state enabled by DLT
Each use case can be read individually according to the table below:
WORLD ECONOMIC FORUM | 2016 31
Section 3
Use Case Deep‐Dive Approach
WORLD ECONOMIC FORUM | 2016 32
Use cases for this report were identified across each function within financial services
Disruptive innovation DLT use cases in
in Financial Services, Financial Services,
June 2015 July 2016
Use case portfolio selection criteria
1. Representation of DLT implementations across various asset classes across multiple subsectors
2. Demonstration of scenarios where DLT must be implemented in a networked or single entity environment
3. Consideration of implementations that could be justified both on financial and non‐financial/strategic grounds
WORLD ECONOMIC FORUM | 2016 33
Use case deep‐dives were conducted and summarized in a standardized format
Use case deep‐dives that follow a standardized format were conducted to strike a balance between the possible and practical in order to
consider how the structure of financial services might be transformed by DLT.
Use case deep‐dive structure
Introduction Current state Future state Critical conditions Conclusion
The goals
Educate the community on the key Highlight key conditions that must
Support existing conversations to
DLT value drivers through business‐ be met to implement new,
1 2 distributed financial services
3 implement DLT and initiate new
process‐level use cases discussions elsewhere
infrastructure
Throughout the use case deep‐dives, a broad set of assumptions regarding DLT had to be developed.
WORLD ECONOMIC FORUM | 2016 34
Each use case deep‐dive maintained a consistent focus and set of assumptions
Our focus
• Understanding the direct impacts that DLT can have at the business‐process level on FIs and other market participants
• Analysing use cases that are broadly applicable in global financial markets, occasionally utilizing US regulations as reference points
• Identifying critical conditions for the successful implementation of DLT across the following four categories:
Stakeholder alignment: achievement of shared benefits Regulatory: compliance‐related requirements
Technology: implementation dependencies Governance: administration and liability oversight
Our assumptions A note on security considerations
1. We assume that enabling capabilities (e.g. digital identity) are Similar to any technological innovation, DLT comes with a set of
available to be incorporated, in conjunction with distributed risks that must be considered:
ledger technology, to meet each use case’s goals securely and
1. Ensuring that distributed ledgers are secure and safeguarded
effectively
against errors is paramount to the long‐term success of the
2. We assume that distributed ledger solutions implemented in technology and should not be treated the same as
the near future will be scalable to meet volume requirements fundamentally questioning the strength of the protocol
(including, in some cases, billions of transactions)
2. While smart contracts enable autonomous agreement
3. We assume data sources that are accessible by distributed execution between parties, they rely on architects and security
ledgers and/or facilitate autonomy cannot be compromised experts to build business rules that prevent malicious
behaviour, complete thorough end‐to‐end testing and verify all
4. We understand that benefits realized will be contingent on
code
specific business models for each FI and jurisdictional
uniqueness 3. Meticulous IT controls must be in place to detect potential gaps
in security across all the inputs, components and outputs of DLT
WORLD ECONOMIC FORUM | 2016 35
Through the deep‐dives, a number of characteristics were discovered that should be
utilized to identify other high‐potential use cases in financial services
Through the examination of nine use cases, a set of common characteristics were identified that appeared to be shared by high‐
potential applications of DLT
Characteristics of high‐potential use cases Example
Ledger that stores financial assets in which an owner and owned assets
A shared repository of information is
Shared repository are tracked and shared with other internal/external parties (e.g.
used by multiple parties
regulators and other geographical units)
More than one entity generates
Payments system collectively managed and maintained by a small group
transactions that require
Multiple writers of banks, but each bank has millions of end users transacting with their
modifications to the shared
bank
repository
Multiple parties within a trade finance arrangement (e.g. importer,
A level of mistrust exists between exporter, issuing bank, receiving bank, correspondent banks and
Minimal trust
entities that generate transactions customs) that do not “trust” each other and, therefore, institute layers of
verification and impose collateral requirements
One (or multiple) intermediary or a
Removing and/or reducing the importance of a central intermediary,
Intermediaries central gatekeeper is present to
whose primary role is to provide “trust” to the post‐trade ecosystem
enforce trust
A situation in which Alice needs to send funds to Bob, then Bob needs to
Interaction or dependency between
Transaction send funds to Charlie. Bob’s transaction is dependent on Alice’s
transactions is created by different
dependencies transaction, and one cannot verify Bob’s transaction without checking
entities
Alice’s first
WORLD ECONOMIC FORUM | 2016 36
Section 4
Use Case Deep‐Dive Summaries
WORLD ECONOMIC FORUM | 2016 37
Reading guide
This section provides a summary of the findings, divided by function and DLT use cases within the function. For each use case, the key
players and impact are summarized, the critical conditions to be successful are identified and the possible outcomes are examined.
Function grouping
DLT use case name
High‐level summary of potential DLT benefits
Key stakeholders involved within use case
Predicted financial services outcomes if DLT
is successfully implemented
Identified conditions that must be met for
DLT to achieve determined benefits
WORLD ECONOMIC FORUM | 2016 38
Use cases | Payments
Global Payments
Summary Money Sender
and Beneficiary Money Transfer
Conducting international money Regulator
Operator
transfers through DLT could
provide real‐time settlement and Local Clearing Sender
reduce costs, enabling new Network Bank
business models (e.g. Beneficiary
micropayments), and institute SWIFT Bank
newer models of regulatory Correspondent
oversight Bank
Implications for FIs
• Real‐time settlement of international money transfers can increase
profitability by reducing liquidity and operational costs
• Utilizing DLT will enable direct interaction between sender and
beneficiary banks, and eliminate the role of correspondents
• Smart contracts can capture obligations and drive reporting,
minimizing operational errors and accelerating outcomes
Critical conditions for implementation
• Ensuring compliance via standard KYC processes
• Binding legality of cryptographic hash to exchange value
• Adopting standards and ensuring interoperability
WORLD ECONOMIC FORUM | 2016 39
Use cases | Insurance
P&C Claims Processing
Summary
Insuree
Facilitating claims management Insurer
for property and casualty (P&C)
insurers on DLT can automate
processing through smart Reinsurer
contracts, improve assessment Supporting
Data Sources Regulator
through historical claims
information and reduce potential Broker
for fraudulent claims
Implications for FIs
• Smart contracts can automate claims processing through third‐party
data sources and codification of business rules
• DLT can drive reductions in operating costs through process
simplification
• Storing historical claims information on the ledger will enable
insurers to identify suspicious behaviour and improve assessment
Critical conditions for implementation
• Building a comprehensive set of asset profiles and history
• Adopting standards for relevant claims data
• Providing a legal and regulatory framework
WORLD ECONOMIC FORUM | 2016 40
Use cases | Deposits and Lending
Syndicated Loans Trade Finance
Implications for FIs Implications for FIs
• Forming syndicates through smart contracts can increase speed and • Storing financial details on the ledger can automate the creation
provide regulators with a real‐time view to facilitate AML/KYC and management of credit facilities through smart contracts
• Performing risk underwriting through DLT can substantially reduce • DLT can improve real‐time visibility to the transaction to better
the number of resources required to perform these activities institute regulatory and customs oversight
• Smart contracts can facilitate real‐time loan funding and automated • Utilizing DLT will enable direct interaction between import and
servicing activities without the need for intermediaries export banks, and eliminate the role of correspondent banks
Critical conditions for implementation Critical conditions for implementation
• Building risk rating framework for syndicate selection • Providing transparency into trade finance agreements
• Standardizing diligence and underwriting templates • Enabling interoperability with legacy platforms
• Providing access to financial details on the distributed ledger • Rewriting regulatory guidance and legal frameworks
WORLD ECONOMIC FORUM | 2016 41
Use cases | Capital Raising
Contingent Convertible (“CoCo”) Bonds
Summary Financial
Utilizing smart contracts to Institution
automate regulator reporting can
minimize the need for point‐in‐
Regulator
time stress tests, reduce market
volatility and, ultimately, increase
“CoCo” bond issuance
Investor
Implications for FIs
• Tokenizing bond instruments when soliciting capital from investors
can enable them to make informed, data‐driven decisions
• Smart contracts can alert regulators when loan absorption needs to
be activated, minimizing need for point‐in‐time stress tests
• Providing investors with transparency into loan absorption can
reduce uncertainty currently associated with “CoCo” bonds
Critical conditions for implementation
• Standardizing attributes for soliciting investments
• Streamlining trigger calculations across FIs
• Developing processes to act on real‐time trigger notifications
WORLD ECONOMIC FORUM | 2016 42
Use cases | Investment Management
Automated Compliance Proxy Voting
Summary Financial
Summary Corporation
Regulator
Utilizing DLT to store financial Auditor Institution Distributing proxy statements via
information can eliminate errors DLT and counting votes via smart
associated with manual audit Regulator contracts may improve retail
activities, improve efficiency, Internal investor participation, automate
reduce reporting costs and, Revenue the validation of votes and,
Accountant
potentially, support deeper Service potentially, enable personalized
Federal Third Party/ Investor
regulatory oversight in the future Reserve analyses in the future Intermediaries
Implications for FIs Implications for FIs
• Storing financial information on the ledger provides immutable, • Distributing proxy statements via the distributed ledger can reduce
real‐time updates and facilitates automated review costs associated with printing and mailing
• Executing reporting activities through smart contracts can facilitate • Smart contracts can automate the validation of votes and increase
the automated creation of quarterly and annual findings the transparency of counting votes (e.g. end‐to‐end confirmation)
• In the future, DLT can seamlessly execute and automate compliance • Storing proxy statements on the ledger may enable investors to
activities (e.g. Comprehensive Capital Assessment Review) conduct personalized, automated analyses in the future
Critical conditions for implementation Critical conditions for implementation
• Providing compartmentalized access to data • Storing investment records on a distributed ledger
• Automating faster and efficient enforcement of regulations • Integrating legacy voting mechanisms into tokens
• Enabling interoperability with legacy platforms • Collaborating across actors to ensure success
WORLD ECONOMIC FORUM | 2016 43
Use cases | Market Provisioning
Asset Rehypothecation Equity Post‐Trade
Implications for FIs Implications for FIs
• Rating counterparties based on transaction history stored on DLT • Conducting clearing activities through the ledger can automate
can enable investors to improve investment decisions processes, reduce settlement time and lower counterparty risk
• Smart contracts enable the real‐time reporting of asset history and • Smart contracts can simultaneously transfer equity and cash in real
the enforcement of regulatory constraints time, reducing the likelihood of errors impacting settlement
• Facilitating clearing and settlement processes via smart contracts • Disintermediating clearing, settlement and servicing processes can
can eliminate need for intermediaries and reduce settlement time reduce costs and enable capital & liquidity management efficiencies
Critical conditions for implementation Critical conditions for implementation
• Tokenizing assets using a shared standard • Incorporating “net transaction” benefits within settlement
• Fostering engagement among the financial ecosystem • Achieving multistakeholder alignment across participants
• Architecting solution to manage over‐the‐counter (OTC) templates • Standardizing reference data utilized to match trades
WORLD ECONOMIC FORUM | 2016 44
Section 5
Use Case Deep‐Dive Modules
WORLD ECONOMIC FORUM | 2016 45
Section 5.1
Payments: Global Payments
WORLD ECONOMIC FORUM | 2016 46
Global Payments
Introduction
Current‐state background
A payment refers to the process of transferring value from one individual or organization to another in exchange for goods, services
or the fulfillment of a legal obligation. Global payments are an expansion of that concept, in which payments can be completed
across geographical borders through multiple fiat currencies.
Key ecosystem stakeholders Overview
Money Sender • Business is growing fast and steadily : The global payments volume is
and Beneficiary Money Transfer increasing at an approximate rate of 5% yearly worldwide and will reach
Operator an estimated US$ 601 billion in 2016.1 Revenue is growing in all regions,
especially in Asia where China will likely surpass Brazil as the third largest
Regulator payment area after the United States and the Eurozone2, 3
• Profit margins are high: The average cost to the final customer (money
sender) is 7.68% of the amount transferred
Sender
Bank • Newcomers are arriving: Non‐bank transactions are reaching up to 10%
of the total payments volume2
Local Clearing
Network
The focus of this use case is on low value−high volume payments from an
Beneficiary individual/business to an individual via banks or money transfer operators.
SWIFT
Bank These transfers are more commonly known as remittances
Correspondent Bank
1. Migration and Remittances Factbook 2016, World Bank, 2016.
WORLD ECONOMIC FORUM | 2016 2. Top 10 Trends in Payments in 2016, Capgemini, 2016. 47
3. Global Payments 2015: A Healthy Industry Confronts Disruption, McKinsey & Company, 2015.
Global Payments
Key market participants
Non‐bank companies specialized in international money transfer through a global
Money Transfer Operator Core
network of agents
A bank that has access to foreign exchange (FX) corridors and facilitates the
Correspondent Bank Supporting
transfer (via nostro accounts and SWIFT)
The global member‐owned cooperative provider of secure financial messaging and
SWIFT Supporting
settlement services
The national interbank network that allow financial messaging/settlement (e.g.
Local Clearing Network Supporting
ACH, SPB and Zengin)
Central banks and monetary authorities that determine and monitor adherence to
Regulator Supporting
KYC and AML standards
WORLD ECONOMIC FORUM | 2016 48
Global Payments
Current‐state process depiction
Current‐state process description
1 Sender needs to send money to The bank or money transfer 3 The beneficiary is notified and 6 Periodically, according to local
another country and operator will move money across approaches a bank or money regulations, the bank and
approaches a bank or money borders through either of the transfer operator money transfer operator will
transfer operator, which does following mechanisms: 4 Depending on the pre‐existing provide reports to regulators
the following: 2‐a Utilizes SWIFT network (part of relationship, KYC may be containing transaction details
‐ Performs AML/KYC SWIFT network) performed by the bank or (e.g. sender and beneficiary ID,
activities money transfer operator currencies, transferred amount
2‐b Facilitates transfer via
and timestamps)
‐ Collects funds and fees correspondent banks (not part 5 The amount due in local
‐ Confirms and supports of SWIFT network) currency is paid
transfer inquiries/disputes * Transactions can either be
“netted” or initiated per‐transaction
WORLD ECONOMIC FORUM | 2016 49
Global Payments
Current‐state pain points
3 7
Perform KYC SWIFT 6 Periodic
Sender Beneficiary All banks
Perform KYC reports
Process funds bank bank
Local clearing Local clearing Pay funds
Track transfer
Sender network network Beneficiary
1 2 Money Money Money
transfer 4 5 transfer transfer
operator Correspondent operator operator
bank Regulator
Current‐state pain points
1 Inefficient onboarding: 3 Cost and delay: payments are 6 Vulnerable KYC: similar to #2, 7 Demanding regulatory
information about the sender costly and time consuming limited control exists over the compliance: due to various data
and beneficiary is collected via depending on route veracity of information and sources and channels or
manual and repetitive business supporting documentation, with origination, regulatory reports
4 Error prone: information is
processes validated per bank/transaction, various maturity levels across can require costly technology
2 Vulnerable KYC: limited control resulting in high rejection rate institutions capabilities in addition to
exists over the veracity of complex business processes
Liquidity requirement: banks
information and supporting (often supported by multiple
5 must hold funds in nostro
documentation, with various operation teams)
accounts, resulting in
maturity levels across opportunity and hedging costs
institutions
WORLD ECONOMIC FORUM | 2016 50
Global Payments
Future‐state process depiction
Sender ID Transfer amount
7
1 Beneficiary ID Date and time
FX rate Payout conditions
Verify KYC Distributed On‐demand
Sender Beneficiary
Fiat currency Fiat currency Verify KYC ledger reports
Transfer request bank bank
5 Pay funds
Submit transfer
Sender Smart contract Beneficiary
6
2 3 Money 4 Real‐time AML Money
transfer transfer
operator operator
Regulator Regulator
Future‐state process description
1 Trust between the sender and a 4 The regulator can monitor 6 Funds are deposited 7 The transaction history is
bank or money transfer transactions in real time and automatically to the beneficiary available on the ledger and can
operator is established either receive specific AML alerts account via a smart contract or be continuously reviewed by
via traditional KYC or a digital through a smart contract made available for pickup after regulators
identity profile verifying KYC
5 A smart contract enables the
2 A smart contract encapsulates real‐time transfer of funds with
the obligation to transfer funds minimal fees and guaranteed
between sender and beneficiary delivery without the need for
3 The currency conversion is correspondent bank(s)
facilitated through liquidity
providers on the ledger
WORLD ECONOMIC FORUM | 2016 51
Global Payments
Future‐state benefits
Sender ID Transfer amount
7
1 Beneficiary ID Date and time
FX rate Payout conditions
Verify KYC 6 Distributed On‐demand
Sender Beneficiary
Fiat currency Fiat currency Verify KYC ledger reports
Transfer request bank bank
4 5 Pay funds
Submit transfer
Sender Smart contract Beneficiary
2 Money 3 Real‐time AML Money
transfer transfer
operator operator
Regulator Regulator
Future‐state benefits
1 Seamless KYC: leveraging the 3 Real‐time AML: regulators will 6 Seamless KYC: leveraging the 7 Automated compliance: the
digital profile stored on DLT have access to transaction data digital profile stored on DLT regulator will have on‐demand
establishes trust and and can receive specific alerts establishes trust and access to the complete
authenticates the sender based on predefined conditions authenticates the beneficiary transaction history over the
ledger
2 FX liquidity capabilities: 4 Reduced settlement time:
through smart contracts, cross‐border payments can be
foreign exchange can be completed in real time
sourced from participants 5 Cost savings: with fewer
willing to facilitate the participants, the improved cost
conversion of fiat currencies structure can generate value
WORLD ECONOMIC FORUM | 2016 52
Global Payments
Critical conditions
Critical condition categories
Stakeholder
WORLD ECONOMIC FORUM | 2016 Technology Regulatory Governance 53
alignment
Global Payments
Additional considerations
Cryptocurrency as the linking
DLT enabled by global banks Embedded solution
currency
WORLD ECONOMIC FORUM | 2016 54
Global Payments
Conclusion
Summary Outlook
• Real‐time settlement: enabling banks can fulfil and settle • SWIFT is implementing a “Global Payments Innovation
international money transfers in real time, while increasing Initiative” to facilitate global payments with transparent fees
profitability via a reduction in liquidity and operations costs and same‐day funds delivery but this initiative does not employ
DLT
• Reduced fraud: transparent and immutable data on DLT can
reduce fraudulent transactions to a fraction of what they are • Currently, the adoption of DLT for global payments by
today incumbent banks is limited, although concrete initiatives are
occurring in North America and Europe across retail and
• Development of digital obligations: smart contracts can be
wholesale banking
used to capture obligations among FIs in order to ensure that
appropriate funds are exchanged, eliminating operational • Opportunities exist for regulators to assess and promote the
errors viability of prototypes and future implementations within
current regulatory frameworks
Key takeaways Unanswered questions
• Challenge correspondent banks: DLT has the potential to • Initiatives: Will retail and wholesale banking initiatives merge
disrupt the role of dedicated banks that act as gateways to towards common DLT implementation despite competing
international fund transfers interests?
• Allow direct interaction between sender and beneficiary • Volatility: Is there a role for cryptocurrencies as a bridge asset
banks: DLT can give direct access to most if not all relevant to facilitate FX?
destinations for adopting banks and money transfer operators
• SWIFT: What role will SWIFT play in enabling DLT‐based global
• Enable micropayments: DLT can make low‐value transactions payments?
more feasible to FIs as cost structures are modified
WORLD ECONOMIC FORUM | 2016 55
Section 5.2
Insurance: P&C Claims Processing
WORLD ECONOMIC FORUM | 2016 56
P&C Claims Processing
Introduction
Current‐state background
Insurance is a financial risk management product in which an individual or entity receives protection against losses (e.g. property,
asset, casualty and health) from the insurer. Commercial property and casualty (P&C) insurance (e.g. commercial motor, commercial
property and commercial liability) protects businesses against risks that may result in loss of life or property.
Key ecosystem stakeholders Overview
Insuree • P&C is large: P&C is the second largest segment of insurance worldwide
(after life and health) with earned premiums in 2014 of US$ 728.6 billion,
Insurer growing at 5.1% since 2010, and is set to reach US$ 895.1 billion by 20181
• Claims processing is a key bottleneck: For P&C insurance, the tasks
associated with claim and loss processing are a major source of friction,
accounting for an average of 11% of the overall written premium
(revenue)2
Reinsurer
Supporting
Data Sources
Regulator DLT has the potential to optimize the back‐office operational costs of property
and casualty insurers. This use case highlights the key opportunities in claims
processing for the P&C commercial insurance business
Broker
1. Global Commercial Non‐Life Insurance: Size, Segmentation
WORLD ECONOMIC FORUM | 2016 and Forecast for the Worldwide Market, Finaccord, 2015. 57
2. ISO Verisk Analytics, 2016.
P&C Claims Processing
Key market participants
Companies looking for insurance to cover their underlying operational risks
Insuree Core
(properties and casualties)
A company that, through a contractual agreement, undertakes to compensate
Insurer Core
specified losses, liability or damages incurred by another company
A company that provides financial protection to insurance companies handling
Reinsurer Core
risks that are too large for insurance companies to handle on their own
Insurance supervisory agency and central banks that determine and monitor
Regulator Supporting
adherence to KYC, AML, risk concentration, liquidity and solvency standards
A specialized company or registered professional that acts as an intermediary,
Broker Supporting
advising and connecting insurees with insurers
Diversified sources of information used by insurers to assess underwriting risks
and evaluate claims and losses; they can include authorities, experts and official
Supporting Data Sources Supporting
data sources, among others (e.g. police report, weather database, official
inspection reports, asset ownership records)
WORLD ECONOMIC FORUM | 2016 58
P&C Claims Processing
Current‐state process depiction
1 Report loss
2 Request additional
Claim approved
information
Provide requested 5 6 Provide 7
Insuree information Broker Insurer Loss adjuster Claims agent additional Loss adjuster Claims agent
information
3 Submit claim Asset Weather Credit Inspection Authority Initiate
8
database statistics reports provider report payment
Broker Insuree
4 6
5
Confirm Request additional
Insurer Reinsurer Reinsurer Loss adjuster Claims agent Insuree
submission information
Current‐state process description
1 Insuree reports loss and claims 4 After verifying the documentation received, the insurer(s) confirm 7 After concluding claim
restitution from an insurer (and receipt of the claim submission assessments, the loss adjuster
reinsurer, if applicable) via a 5 Loss adjusters perform claim assessments and verify the validity of the
within each insurer reaches a
broker (or independently) claims through client information, secondary data sources (e.g. conclusion about the claim
2 Broker may request additional weather statistics and authority reports) or additional inspection 8 If the claim is approved,
information from insuree to assessments/interviews payment to the insuree is
support the loss claim 6 If additional information is required by the insurer, a new information initiated via an insurer’s claims
agent
3 Broker submits the claim to the request is made to the broker or insuree. In some situations, the
insurer and reinsurer (in cases insuree must collect supporting documentation directly from
of syndicate insurance or secondary data sources
reinsurance)
WORLD ECONOMIC FORUM | 2016 59
P&C Claims Processing
Current‐state pain points
1 Report loss
2 Request additional
Claim approved
information
Provide requested 4 Provide 5
Insuree information Broker Insurer Loss adjuster Claims agent additional Loss adjuster Claims agent
3 information
Submit claim Asset Weather Credit Inspection Authority Initiate
database statistics reports provider report payment
Broker Insuree
4
4
Confirm Request additional
Insurer Reinsurer Reinsurer Loss adjuster Claims agent Insuree
submission information
Current‐state pain points
1 Undesirable customer 3 Fragmented data sources: insurers must establish individual 5 Manual claim processing: loss
experience: to initiate a claim, relationships with third‐party data providers to get manual access to adjusters are required to review
the insuree must complete a supporting asset, risk and loss data that may not be updated claims and to:
complex questionnaire and 4 Fraud prone: the loss assessment is completed on a per‐insurer and ‐ Ensure their completeness
maintain physical receipts of per‐loss basis with no information sharing between insurers, ‐ Request additional
the costs incurred by the loss increasing the potential for fraud and manual rework information or use
Costly intermediaries: brokers supporting data sources
2 act as intermediaries during ‐ Validate loss coverage
processing, adding delays and
costs to the submission ‐ Identify the scope of the
liability
‐ Calculate the loss amount
WORLD ECONOMIC FORUM | 2016 60
P&C Claims Processing
Future‐state process depiction
Request loss Claim approved
1 Submit claim 4 confirmation data
Asset Weather Credit Inspection Authority
database statistics reports provider report 7
Insuree Confirm coverage
Loss adjuster Smart
Request manual review
contract
or 2 3 5 6 Initiate
Smart payment
contract
Insuree information Coverage period
Smart Covered asset information Claim history
asset Coverage terms Loss submission details Insurer Loss adjuster Reinsurer Loss adjuster Insuree
Future‐state process description
1 Loss information is submitted 3 Claim due diligence is automated via codified business rules within the 7 If the claim is approved,
by the insuree or smart asset smart contract, using information submitted by the insuree payment to the insuree is
(via sensors or external data initiated via a smart contract
4 DLT automatically utilizes secondary data sources to assess the claim
sources if the asset is and calculate the loss amount
technologically capable),
triggering an automated claim 5 Depending on the insurance policy, a smart contract can automate the
liability calculation for each carrier where a syndicate (or insurers or
application
2 reinsurers) exists
For insurance policies issued via
a smart contract, insurees 6 In predetermined situations, the smart contract can trigger an
additional assessment of the claim in order to reach a final
receive feedback regarding
decision/calculation
initial coverage in real time
WORLD ECONOMIC FORUM | 2016 61
P&C Claims Processing
Future‐state benefits
Request loss Claim approved
1 Submit claim 5 confirmation data
Asset Weather Credit Inspection Authority
database statistics reports provider report 6
Insuree Confirm coverage
Loss adjuster Smart
Request manual review
contract
or 2 3 4 Initiate
Smart payment
contract
Insuree information Coverage period
Smart Covered asset information Claim history
asset Coverage terms Loss submission details Insurer Loss adjuster Reinsurer Loss adjuster Insuree
Future‐state benefits
1 Simplified and/or automated 2 Enhanced customer experience: through the streamlined transfer of 5 Integrated data sources: DLT
claim submission: through a loss information from insuree to insurer, DLT eliminates the need for facilitates the integration of
smart contract, the claim brokers and reduces claim processing times various data sources from
submission process will be trusted providers with minimal
3 Automated claim processing: business rules encoded in a smart
simplified and/or fully contract eliminate the need for loss adjustors to review every claim required manual review
automated (in cases of smart (functionality will enable the loss adjuster to review the claim and Streamlined payment process:
assets) provide a decision, in specific risk situations) 6 in most cases, the smart
contract will facilitate the
4 Reduction in fraudulent claims: the insurer will seamlessly have
access to historical claims and asset provenance, enabling better payment automatically without
identification of suspicious behaviour effort from the back office
WORLD ECONOMIC FORUM | 2016 62
P&C Claims Processing
Critical conditions
Critical condition categories
Stakeholder
WORLD ECONOMIC FORUM | 2016 Technology Regulatory Governance 63
alignment
P&C Claims Processing
Conclusion
Summary Outlook
• Claims automation: Claims processing can be automated using • The application of DLT within insurance is currently in its
trusted third‐party data sources and the codification of infancy, with a number of incumbents and new entrants
business rules in smart contracts on the ledger providing early proof of concept, focusing on:
‐ Creation of immutable insurance claim records
• Reduced fraud: Transparent and immutable data on the ledger
‐ Development of asset provenance to assist in risk
can also reduce fraudulent claims to a fraction of what they are
profiling and claims processing
today
‐ P2P insurance
• Opportunities exist for regulators/FIs to:
‐ Monitor and assess new DLT‐based products (e.g. P2P
insurance)
‐ Guide the industry towards a lower‐cost model via the
common and shared implementation of DLT
Key takeaways Unanswered questions
• Smart contracts will be key: Insurance policies can • Profitability: Will the automated processing of claims have
be managed using smart contracts on DLT, capturing coverage adverse effects on loss ratios?
conditions, and syndicate insurance agreements or insurer‐
• Pricing: What impact will changes in loss ratios have on
reinsurer agreements
insurance premiums?
• Loss adjustment expenses may become irrelevant: DLT
utilization will fundamentally disrupt the cost and profitability
ratios that are currently in use across the insurance industry
WORLD ECONOMIC FORUM | 2016 64
Section 5.3
Deposits and Lending: Syndicated Loans
WORLD ECONOMIC FORUM | 2016 65
Syndicated Loans
Introduction
Current‐state background
Syndicated loans provide clients with the ability to secure large‐scale diversified financing at the current market rate. These loans are
funded by a group of investors (e.g. syndicate), where one investor serves as the lead arranger. The lead arranger serves as the
underwriter for the loan and performs all administrative tasks throughout the loan life cycle, charging a fee based on the complexity
and risk factors associated with the loan.
Key ecosystem stakeholders Overview
• The US market is dominated by incumbents: Four US FIs accounted for
Regulator Lead Arranger more than 50% of the market share (US$ 1,917 billion total volume) in
20141
• The EMEA market is large: The total EMEA syndicated loan volume in
2014 amounted to US$ 1,214.5 billion1
• The Asia‐Pacific market is growing: The Asia‐Pacific (ex‐Japan)
syndicated loan volume increased by 22% in 2014, bringing total volume
to US$ 524.2 billion1
• The Latin American market is immature: The total Latin American
syndicated loan volume in 2014 amounted to US$ 42.2 billion1
Requesting Syndicate
DLT has the potential to optimize syndicated loan back‐office operations. This
Entity
use case highlights key opportunities in the end‐to‐end syndicated loan
process
1. Global Syndicated Loans: League Tables 2014, Bloomberg, 2014.
WORLD ECONOMIC FORUM | 2016 66
Syndicated Loans
Key market participants
An FI that leads a group of investors through the underwriting and financing of a
Lead Arranger Core
large loan
A group of investors formed into one entity for the purpose of distributing risk
Syndicate Core
across institutions for large transactions
WORLD ECONOMIC FORUM | 2016 67
Syndicated Loans
Current‐state process depiction
Syndicate
Member 1 Member 2 Member 3
Member 1 Member 2 Member 3 25% pledged 20% pledged 25% pledged
Member 1 Member 2 Member 3
Current‐state process description
1 A corporation requests a loan 4 The lead arranger facilitates the 5 Syndicate members pledge a 6 The lead arranger takes on the
from an FI (referred to as the investigation of the percentage of the overall risk administrative responsibility for
lead arranger within the corporation’s financial health to based on their respective servicing throughout the agreed
syndicated loan market) determine credit worthiness tolerance levels upon contract life cycle (e.g.
The lead arranger performs KYC and the level of risk associated funding the loan and dispersing
with the loan principal and interest payments
2 procedures in accordance with
regulatory requirements to syndicate members)
To reduce risk, the lead
3 arranger sources prospective
members to fund the loan
WORLD ECONOMIC FORUM | 2016 68
Syndicated Loans
Current‐state pain points
3
Syndicate
Member 1 Member 2 Member 3
Member 1 Member 2 Member 3 25% pledged 20% pledged 25% pledged
Member 1 Member 2 Member 3
Current‐state pain points
1 Time‐intensive process: 3 Lack of technology integration: 5 Lack of technology integration: 8 Delayed settlement time: while
selecting syndicate members due diligence team members underwriting systems do not verifying funds, payments settle
based on financial health and reference various applications communicate with diligence t+3 (trade date plus three days),
industry expertise is time‐ and data sources, resulting in systems, duplicating efforts delaying investors from
intensive and inefficient due to additional time required and a 6 Inefficient fund disbursal: the 9 obtaining funds
manual review processes potential for errors lead arranger facilitates Costly intermediaries: third‐
2 Time‐intensive review: 4 Labour‐intensive process: the principal and interest disbursal, party organizations facilitate
analysing a corporation’s documentation of syndicate resulting in additional costs to servicing operations, resulting in
financial information is time‐ member pledging is labour‐ investors additional costs to investors
7 10
intensive and inefficient due to intensive and inefficient due to Default risk: the lead arranger Siloed systems: activities are
manual review processes reliance on manual activities poses a risk in the disbursement duplicative since systems do not
of funds throughout the loan communicate with one another
life cycle
WORLD ECONOMIC FORUM | 2016 69
Syndicated Loans
Future‐state process depiction
4 Principal & interest
Risk tolerance 5
Corporation Smart contract Lead arranger
3 Corporation Smart contract Regulator
2 Member 1 30% pledged
Assets Loan funding
Servicing documents
Liabilities Syndication fee payment
dispersion
Project Plan Principal and interest payments
Lead arranger Smart contract
Member 2
Future‐state process description
1 A corporation requests a loan from an FI 4 Leveraging the corporation’s financial 6 Smart contracts eliminate the need for a
acting as the lead arranger information and project plan data accessible third party to fund the loan, disperse funds
2 Leveraging the corporation’s digital identity, through the DLT, diligence activities are and facilitate the loan servicing process
the lead arranger performs KYC activities in automated via a smart contract
7 Embedded regulation facilitates the review
real time through the DLT’s record‐keeping 5 Key attributes from the diligence process are of financial details to ensure AML
functionality, which also provides regulators populated into the underwriting template, procedures are followed appropriately
with a transparent view of activity streamlining the process and reducing time
through the DLT’s transfer of value capability
3 The investor’s financial records and risk
tolerance stored on DLT automates the
selection process, reducing the time it takes
to form a syndicate
WORLD ECONOMIC FORUM | 2016 70
Syndicated Loans
Future‐state benefits
3 Principal & interest
Risk tolerance 4
Corporation Smart contract Lead arranger
1 Corporation Smart contract Regulator
Member 1 30% pledged
Assets Loan funding
Servicing documents
Liabilities Syndication fee payment
dispersion
Project Plan Principal and interest payments
Lead arranger Smart contract
Member 2
2
Future‐state benefits
1 Automated syndicate formation: through 3 Automated diligence and underwriting: 5 Reduced closing time: loan funding is
programmable selection criteria within a corporation financial information analysis facilitated in real time, eliminating
smart contract, syndicate formation is and risk underwriting are automated, traditional t+3 settlement and centralized
automated, reducing the time for a reducing the execution time and the amount lead arranger operations
corporation’s loan to be funded of resources required to perform these
6 Servicing disintermediation: activities are
activities
2 Embedded regulator: throughout the 4 executed via smart contracts, eliminating the
syndicated loan life cycle, regulators are Technology integration: diligence systems need for third‐party intermediaries
provided with a real‐time view of financial communicate pertinent financial information 7 Reduced counterparty risk: the
details to facilitate AML/KYC activities to underwriting systems, streamlining disbursement of principal and interest
process execution and reducing underwriting payments throughout the loan life cycle is
time automated, reducing operational risk
WORLD ECONOMIC FORUM | 2016 71
Syndicated Loans
Critical conditions
Critical condition categories
Stakeholder
WORLD ECONOMIC FORUM | 2016 Technology Regulatory Governance 72
alignment
Syndicated Loans
Conclusion
Summary Outlook
• Underwriting automation: Underwriting activities can be • Applications of DLT within syndicated loans are currently being
automated, leveraging financial details stored on the explored at the proof‐of‐concept level with a number of
distributed ledger incumbents, focusing on:
‐ Smart contract settlement and servicing
• Regulatory transparency: Compliance officials are provided
‐ Automated underwriting
real‐time tools to enforce KYC requirements
• Opportunities exist for FIs to reduce closing‐time operational
• Cost savings: DLT can provide a global cost reduction
risk and manual activities:
opportunity within the process execution and settlement
‐ Loan funding executed via smart contract
subprocesses of syndicated loans
‐ Account servicing facilitated via smart contract
‐ Automated underwriting activities
Key takeaways Unanswered questions
• Manage loan life cycle via smart contracts: Syndicated loans • Automated AML activities: What are the implications of
can be managed using smart contracts on DLT – KYC making KYC information more public? Is this a key step to
verification, due diligence review, underwriting automation, mutualizing KYC information among FIs?
loan funding, payment dissemination, etc. – as the loan moves
through the syndicated loan life cycle
• Execute servicing disintermediation: Traditionally performed
by a third party, closing and servicing activities are executed via
smart contract, eliminating third‐party fees
WORLD ECONOMIC FORUM | 2016 73
Section 5.4
Deposits and Lending: Trade Finance
WORLD ECONOMIC FORUM | 2016 74
Trade Finance
Introduction
Current‐state background
Trade finance is the process by which importers and exporters mitigate trade risk through the use of trusted intermediaries. FIs serve
as the trusted intermediary providing assurance to sellers (in the event the buyer doesn't pay) and contract certainty to buyers (in the
event that goods are not received). Regardless of counterparty performance, payment and delivery terms (e.g. prepayment,
piecemeal or upon delivery) are documented in a letter of credit or open account contract vehicle. FIs command a fee for
documentation/oversight of payment terms and for taking on the risk position of either the importer or exporter.
Key ecosystem stakeholders Overview
Importer • Financing dominates world trade: Today’s trade operations are
facilitated through financing. US$ 18 trillion of annual trade transactions
involve some form of finance (credit, insurance or guarantee)1
Correspondent Import
Banks Bank • The trade finance market is large: Since financing has become such an
integral part of trading, the market has grown substantially to more than
US$ 10 trillion annually1
Customs Exporter
Freight Export
Bank
DLT has the potential to optimize the regulatory and operations costs of trade
Inspection Company finance. This use case highlights the key opportunities in the end‐to‐end trade
finance process
1. Improving the Availability of Trade Finance in Developing
WORLD ECONOMIC FORUM | 2016 Countries: An Assessment of Remaining Gaps, World Trade Organization, 2015. 75
Trade Finance
Key market participants
WORLD ECONOMIC FORUM | 2016 76
Trade Finance
Current‐state process depiction
Financials
agreement goods 10 payment
Verified Product
7 goods shipped
4 5
3 8
Financials Financials Customs Freight Customs Payment
Import bank Correspondent bank Export bank Country A Country B Correspondent bank Export bank
Current‐state process description
1 An importer and exporter agree to the sale of a 5 The export bank provides the exporter with the 9 Following inspection, the goods
product at a future date and time financing details, which enables the exporter to are delivered to the importer,
2 The financial agreement is captured within an
initiate the shipment which provides a receipt
invoice, which identifies the quantity of goods sold, 6 A trusted third‐party organization inspects the notification to the import bank
price and delivery timeline goods for alignment with the invoice 10 Upon receiving notification, the
3 The importer provides a bank with a copy of the
import bank initiates the
7 Local customs agents within the export country
financial agreement for review inspect the goods based on the country code payment to the export bank
through the correspondent
4 The import bank reviews the financial agreement 8 The goods are transported by freight from Country bank
and provides financials on behalf of the importer to A to Country B and local customs agents within the
a correspondent bank, which has established a import country inspect the goods based on the
relationship with the export bank country code
WORLD ECONOMIC FORUM | 2016 77
Trade Finance
Current‐state pain points
Financials
agreement goods 7 payment
Verified Product
4 goods shipped
3 8
5 6
Financials Financials Customs Freight Customs Payment
Import bank Correspondent bank Export bank Country A Country B Correspondent bank Export bank
Current‐state pain points
1 Manual contract creation: the import bank 4 Manual AML review: the export bank must 7 Multiple versions of the truth:
manually reviews the financial agreement provided manually conduct AML checks using the financials as financials are sent from one
by the importer and sends financials to the provided by the import bank entity to another, significant
correspondent bank version control challenges exist
5 Multiple platforms: since each party across
2 Invoice factoring: exporters use invoices to achieve countries operates on different platforms, as changes are made
short‐term financing from multiple banks, adding miscommunication is common and the propensity 8 Delayed payment: multiple
additional risk in the event the delivery of goods for fraud is high intermediaries must verify that
fails funds have been delivered to
6 Duplicative bills of lading: bills of lading are
the importer as agreed prior to
3 Delayed timeline: the shipment of goods is financed multiple times due to the inability of
delayed due to multiple checks by intermediaries banks to verify their authenticity the disbursement of funds to
and numerous communication points the exporting bank
WORLD ECONOMIC FORUM | 2016 78
Trade Finance
Future‐state process depiction
Financial
3
2 agreement + + +
Shipment Letter of Shipment Smart Payment
Import bank Export bank initiated credit received contract complete Export bank
Future‐state process description
1 Following the sale agreement, 3 The export bank reviews the letter of credit; once approved a smart 7 The importer digitally
the financial agreement is contract is generated to cover the terms and conditions of the letter acknowledges receipt of the
shared with the import bank of credit goods, which initiates payment
through a smart contract 4 The exporter digitally signs the letter of credit within the smart from the import bank to the
export bank via a smart contract
2 The import bank reviews the contract to initiate shipment
arrangement, drafts the terms 5 Goods are inspected by a third‐party organization and the customs
of the letter of credit and agent in the country of origin (all requiring a digital signature for
submits it to the export bank for approval)
approval
6 The goods are transported by freight from Country A to Country B and
inspected by local customs agents prior to being received by the
importer
WORLD ECONOMIC FORUM | 2016 79
Trade Finance
Future‐state benefits
Future‐state benefits
1 Real‐time review: financial 3 Disintermediation: banks facilitating trade finance through DLT do not 7 Automated settlement and
documents linked and require a trusted intermediary to assume risk, eliminating the need for reduced transaction fees:
accessible through DLT are correspondent banks contract terms executed via
reviewed and approved in real smart contract eliminate the
4 Reduced counterparty risk: bills of lading are tracked through DLT,
time, reducing the time it takes eliminating the potential for double spending need for correspondent banks
to initiate shipment and additional transaction fees
5 Decentralized contract execution: as contract terms are met, status is
2 Transparent factoring: invoices updated on DLT in real time, reducing the time and headcount 8 Regulatory transparency:
accessed on DLT provide a real‐ required to monitor the delivery of goods regulators are provided with a
time and transparent view into real‐time view of essential
6 Proof of ownership: the title available within DLT provides
subsequent short‐term documents to assist in
transparency into the location and ownership of the goods
financing enforcement and AML activities
WORLD ECONOMIC FORUM | 2016 80
Trade Finance
Critical conditions
Critical condition categories
Stakeholder
WORLD ECONOMIC FORUM | 2016 Technology Regulatory Governance 81
alignment
Trade Finance
Conclusion
Summary Outlook
• Letter of credit automation: Letter of credit creation can be • The application of DLT within trade finance is currently being
automated leveraging financial details stored on the distributed explored at the proof‐of‐concept level with a number of
ledger incumbents, focusing on:
‐ Letters of credit encapsulated in a smart contract
• Regulatory transparency: Compliance officials are provided
‐ Electronic invoice ledger
real‐time tools to enforce AML and customs activities
• Opportunities exist for FIs to reduce counterparty risk and fraud
• New product opportunities: DLT within global trade networks
by:
will yield new product opportunities for incumbents (or
‐ Providing transparent invoice factoring
innovators) around lending and securitization of trade
‐ Reducing bill of lading double spending via transparent
obligations
tracking
• Cost savings: DLT can yield cost savings associated with letter
of credit creation, process automation and fraud reduction
Key takeaways Unanswered questions
• Manage letters of credit via smart contracts: Letters of credit • Pricing: What is the impact on financing fees (taking into
can be managed using smart contracts on DLT – capturing account the cost of implementation) as correspondent banks
shipment details, financial information and payment data as the are eliminated from the trade finance process?
letter of credit moves through the trade finance process
• Level of disruption: how will the import banks and export
• Consider correspondent banking disruption: DLT utilization can banks ensure that they are not disrupted by new or existing
fundamentally disrupt the role of correspondent banks as FIs market participants?
work directly with one another
WORLD ECONOMIC FORUM | 2016 82
Section 5.5
Capital Raising: Contingent Convertible (“CoCo”) Bonds
WORLD ECONOMIC FORUM | 2016 83
Contingent Convertible (“CoCo”) Bonds
Introduction
Current‐state background
Contingent convertible (“CoCo”) bonds are financial instruments that enable banks to increase their capital ratio in case it falls below
a predefined threshold. Unlike traditional bonds, "CoCo" bonds provide banks with the ability to convert the bond into equity if a
capital ratio condition is met (e.g. bank capital falls below 7.5%) or a discretionary circumstance is determined by the
bank/regulators. Today’s banks are responsible for calculating their own capital ratio, and regulators do not have insight unless they
request a stress test.
Key ecosystem stakeholders Overview
• "CoCo" bond issuance has flatlined: After experiencing continued
Financial Institution double‐digit market growth since 2013, issuance flatlined in European
markets in 2015
• A primary concern has been uncertainty: After being developed as a
mechanism to reduce the need for bailouts during financial crises, no
"CoCo" bonds have required conversion to equity, making the market
largely untested so far
Regulator
• Another key concern is the extreme volatility of these instruments:
While yields have been historically high, recent events have had
significant impact. High market volatility, fuelled by regulator stress tests
in 2016, eliminated all yields within six weeks
Investor DLT has the potential to embed regulation into business processes. This use
case highlights key opportunities to reduce volatility and uncertainty
regarding this instrument and potentially to increase "CoCo" bond issuance in
the future
WORLD ECONOMIC FORUM | 2016 84
Contingent Convertible (“CoCo”) Bonds
Key market participants
The individual and/or institution that agrees to the terms outlined during bond
Investor Core
issuance and invests in the asset
The entity that ensures market stability; FIs adhere to their predefined loan
Regulator Supporting
absorption mechanism criteria
WORLD ECONOMIC FORUM | 2016 85
Contingent Convertible ("CoCo") Bonds
Current‐state process depiction
Ongoing
2 Market Yes
Bank Investors Liabilities and
Assets Bank 6 Investors
2 Bank Regulator
Trigger options Trigger options
Capital ratio book‐value Below Capital ratio book‐value
calculation condition? calculation
4 Stress test
Ad hoc
Capital ratio market‐value Capital ratio market‐value
calculation 5 calculation
Regulator Bank
Discretionary Discretionary
Current‐state process description
1 To initiate issuance, the bank 2 After determining bond attributes (e.g. trigger and maturity date), the 4 If any monitoring mechanism
determines a trigger option bank issues “CoCo” bonds to raise funds from a broad set of investors results in requiring loan
through a book‐value or (including retail, banks, hedge funds and insurance companies) absorption to be activated (e.g.
market‐value calculation (e.g. bank capital falls below 7.5% or
3 The issuing bank and regulator monitor the trigger to determine if
bank capital falls below 7.5%) to loan absorption needs to be activated through two ongoing and one discretionary action is taken),
activate loan absorption ad hoc mechanisms: the “CoCo” bond is converted
(conversion of a “CoCo” bond to into equity at a predetermined
a‐ Bank analyses trigger (no frequency mandated by regulator)
equity) conversion rate
b‐ Bank and regulator make discretionary decision (e.g. market
performance)
‐c Regulator requests point‐in‐time stress test to assess capital ratio
WORLD ECONOMIC FORUM | 2016 86
Contingent Convertible ("CoCo") Bonds
Current‐state pain points
Ongoing
2 Market Yes
Bank Investors Liabilities and
Assets Bank 6 Investors
2 Bank Regulator
Trigger options Trigger options
Capital ratio book‐value Below Capital ratio book‐value
calculation condition? calculation
4 Stress test
Ad hoc
Capital ratio market‐value Capital ratio market‐value
calculation 5 calculation
Regulator Bank
Discretionary Discretionary
Current‐state pain points
1 Limited participation: limited 2 Inconsistent trigger calculation methods: banks can complete capital 6 Delayed activation time: since
rating information within the ratio analyses through book‐value (using internal models) or market‐ trigger condition calculation
“CoCo” bonds market limits value (comparing stock market capitalization to assets) calculations frequency is not regulated (e.g.
participation from large bank capital ratios may be
3 Ambiguity: regulators lack insight into capital ratio (aside from
institutional investors requesting point‐in‐time stress tests) and whether loan absorption calculated quarterly), “CoCo”
may need to be activated in the future bonds may not be converted
into equity immediately after
4 Lack of real‐time reporting: regulators must rely on public‐facing,
the condition is met
point‐in‐time stress tests to assess the health of the banks and “CoCo”
bonds market
5 Market fear: bank equities are susceptible to extreme volatility as
investors fear stress test results
WORLD ECONOMIC FORUM | 2016 87
Contingent Convertible (“CoCo”) Bonds
Future‐state process depiction
Alert
“CoCo” bond Yes 6 7 contract
Coupon rate Capital ratio: 7.49%
Maturity date 3 Discretionary input
Trigger Tokenized 5 Regulator
Trigger options
instrument
Trigger options
Smart
contract Below Bank
condition?
Regulator
Future‐state process description
1 Similar to the current state, the 3 The tokenized bond includes key attributes, including a loan 7 After a bank or regulator
issuing bank determines the absorption trigger, issuing bank, coupon rate and maturity date provides discretionary input
trigger option through a book‐ into conversion (can be
4 The bank analyses the current capital ratio to determine if loan
value or market‐value absorption needs to be activated automated in the future), loan
calculation to activate loan absorption can be activated
absorption, and initiates bond 5 The latest calculation is added directly to the tokenized asset for the through a smart contract
bond, providing investors and regulators with transparency into the
issuance
2 status of their issued “CoCo” bonds 8 The “CoCo” bond is converted
The bank issues a tokenized into equity at a predetermined
6 If the trigger is reached, regulators and bank leadership are notified in
“CoCo” bond to raise funds conversion rate
real time through a smart contract
from investors, utilizing the
record‐keeping functionality of
DLT
WORLD ECONOMIC FORUM | 2016 88
Contingent Convertible ("CoCo") Bonds
Future‐state benefits
Alert
“CoCo” bond Yes 3 contract
Coupon rate Capital ratio: 7.49%
Maturity date Discretionary input
Trigger Tokenized Regulator
Trigger options
instrument
Trigger options
Smart
contract Below
4
Bank
condition?
Regulator
Future‐state benefits
1 Increased participation: up‐to‐ 2 Improved calculations: integrating capital ratio calculations directly 5 Real‐time activation time: since
date capital ratio information into DLT can improve data input maturity and calculation frequency the frequency of the trigger
stored within DLT can increase across banks calculation and reporting
confidence and lead to 3 Real‐time reporting: regulators can be notified in real time through a
increases through DLT, the time
developing a “CoCo” bond smart contract if a “CoCo” bond trigger is reached to convert a “CoCo” bond into
rating system, enabling large equity after the condition is met
institutional investors to 4 Reduced stress tests: since regulators have access to a bank’s capital significantly reduces
ratio in real time, bank equity volatility can be reduced as the
participate within the market
likelihood for point‐in‐time stress tests decreases
WORLD ECONOMIC FORUM | 2016 89
Contingent Convertible (“CoCo”) Bonds
Critical conditions
Critical condition categories
Stakeholder
WORLD ECONOMIC FORUM | 2016 Technology Regulatory Governance 90
alignment
Contingent Convertible (“CoCo”) Bonds
Conclusion
Summary Outlook
• Improved monitoring: Ongoing monitoring can be standardized • No significant applications of DLT within the “CoCo” bond life
across FIs while ensuring that regulators receive real‐time cycle have been reported or discussed within blockchain
notifications of impending loan absorption activation research released to date
• Increased investor confidence: Ensuring that processes exist to • While benefits associated with process execution and reporting
improve visibility into monitoring and loan absorption will costs exist, a majority of benefits are ancillary and focused on
increase investor confidence and, potentially, participation improving market stability
• Opportunity exists for regulators to push standardized capital
ratio calculations across FIs and to reduce volatility associated
with requesting point‐in‐time stress tests
Key takeaways Unanswered questions
• Ensure educated and empowered investors: Tokenized bond • Business drivers: Since loan absorption is an indication that a
instruments can enable investors to make informed, data‐ broader crisis may be taking place, is reduced market volatility
driven decisions; improved monitoring processes can reduce enough of a driver to warrant investment?
market uncertainty
• Allow point‐in‐time stress tests to become irrelevant: Smart
contracts can alert regulators when loan absorption needs to
be activated, while ensuring that “over‐reporting” is not a
concern
WORLD ECONOMIC FORUM | 2016 91
Section 5.6
Investment Management: Automated Compliance
WORLD ECONOMIC FORUM | 2016 92
Automated Compliance
Introduction
Current‐state background
FIs are responsible for complying with and reporting on a multitude of regulatory requirements. These activities may be executed
internally by a functional area within the organization or via a third party. Audit, tax, CCAR and routine Securities and Exchange
Commission (SEC) filing (10K/10Q) are just a few compliance‐related activities that add additional cost to FIs’ annual spend.
Key ecosystem stakeholders Overview
• Compliance costs are high: Compliance activities are a major portion of
Financial Institution the cost overhead FIs deal with. In 2014 the largest FIs spent US$ 4 billion
Auditor
in compliance‐related activities1
• Auditing costs are high: Auditing represents one of the largest annual
compliance costs for FIs. On average, public companies paid in excess of
Regulator US$ 7.1 million in audit fees in 20132
Internal
Revenue
Service Accountant
DLT has the potential to increase operational efficiencies and provide
regulators with enhanced enforcement tools. This use case focuses on the key
Federal
opportunities in the financial statement audit process to highlight an
Reserve
automated compliance solution
1. Banks face pushback over surging compliance and regulatory costs,
WORLD ECONOMIC FORUM | 2016 Financial Times, 2015. 93
2. 2015 Annual Audit Fee Report, Financial Executives Research Foundation, 2015.
Automated Compliance
Key market participants
Individual(s) who perform(s) the financial statement examination and provide(s)
Auditor Core
reasonable assurance of the financials via the audit opinion
A monitor who verifies adherence to audit activities (e.g. the CCAR regulator is
Regulator Supporting
responsible for verifying requisite capital is on hand to conduct operations)
Additional Individual(s) responsible for reviewing, preparing and filing the tax statements on
Accountant
participant behalf of the FI
Additional The US government organization responsible for supervising and regulating
Federal Reserve
participant banking institutions
Additional The US government organization responsible for tax collection and tax law
Internal Revenue Service
participant enforcement
WORLD ECONOMIC FORUM | 2016 94
Automated Compliance
Current‐state process depiction
10K/10Q
Current‐state process description
1 Annually, auditors coordinate 3 The bank provides the audit 5 Throughout the process, 7 At the conclusion of the
with the bank to perform the team with copies of financially auditors work directly with the evaluation, the audit team
required audit of financial material data and access to the leadership and representatives releases an opinion of the
statements systems that enable analyses to from the bank to address overall financial health of the
2 Members of the audit team be conducted identified errors within the data bank in the form of an
work directly with the bank to and testing exceptions independent audit report
4 Auditors evaluate the
perform an initial risk information provided for 6 As exceptions are identified, the 8 The bank uses the results of the
assessment and align on the completeness and conduct tests audit team requests additional report to populate its quarterly
scope, objectives, timing and for accuracy in parallel to information to determine the and annual filings
resources required performing the evaluation depth of the concern (10K/10Q)
WORLD ECONOMIC FORUM | 2016 95
Automated Compliance
Current‐state pain points
10K/10Q
Current‐state pain points
1 Resource‐intensive: scope 2 Time‐intensive review: pulling 4 Resource‐intensive: exception 5 Lack of technology integration:
formation, risk assessment and sample data for audit review is and error follow‐up requires information provided in the
audit planning require time‐intensive and inefficient additional interaction with independent audit report does
representatives from multiple due to dependency on manual representatives from multiple not feed directly into quarterly
functional areas, reducing activities functional areas, further and annual filings (10K/10Q),
productivity as individual reducing productivity duplicating efforts
3 Lack of technology integration:
employees cannot complete information is copied from
their daily activities source systems and provided to
auditors, adding inefficient
manual processes that increase
the likelihood of errors
WORLD ECONOMIC FORUM | 2016 96
Automated Compliance
Future‐state process depiction
DLT financial data extraction layer
Accounts Accounts Management
Income Assets Losses Liabilities Depreciation
receivable payable assertions
1 6
Assessment Reporting Additional compliance activities
Independent Comprehensive Capital Assessment Review
Accessed
audit report 5
Federal
through DLT
Bank
Regulator + Reserve
2 Accounts Accounts
Auditor
payable receivable Stored on DLT Enterprise tax filing
Auditor Smart
4 contract
3 10K/10Q Accountant
+ + IRS
Future‐state process description
1 Financially material information is accessible 3 The audit team performs an audit evaluation 6 In the future, DLT is uniquely positioned to
to auditors in real time through the use of a using data directly from the DLT, eliminating seamlessly execute and automate
financial DLT enabled data extraction layer errors generated from manual activity and compliance activities such as:
Since auditors have authorized access to this the requirement for follow‐up ‐ Comprehensive Capital Assessment
2 data, representatives and leadership of the 4 Auditors develop the independent audit Review (pictured)
bank do not need to be involved with audit report and store it on the DLT for real‐time ‐ Enterprise tax filing (pictured)
planning and data distribution access by the bank and regulator
‐ Real time tasks for trading in financial
5 A smart contract facilitates the movement of instruments (e.g. insider trading)
information from the audit report to
‐ Processing information about new
financial reporting instruments, minimizing
regulatory developments
duplicate efforts
WORLD ECONOMIC FORUM | 2016 97
Automated Compliance
Future‐state benefits
DLT financial data extraction layer
Accounts Accounts Management
Income Assets Losses Liabilities Depreciation
receivable payable assertions
1
Assessment Reporting Additional compliance activities
5 6
Independent Comprehensive Capital Assessment Review
Accessed
audit report 4
Federal
through DLT
Bank
Regulator + Reserve
2 Accounts Accounts
Auditor
payable receivable Stored on DLT Enterprise tax filing
Auditor Smart
contract
3 10K/10Q Accountant
+ + IRS
Future‐state benefits
1 Data transparency: enabling data stored 3 Reduced errors: audit teams have In the future, DLT can enable additional
within financial systems to be accessible via authorized access to financial data, compliance activities to be seamlessly executed
DLT through the financial data extraction eliminating errors generated by manual through automation:
layer provides immutable and transparent activities and streamlining the update •5 The bank provides Federal Reserve officials
records that are updated in real time process with authorized access to facilitate
2 Automated review: financial information 4 Integrated systems: reporting activities automated capital analysis and store results
accessible via DLT enables an automated executed via DLT facilitates the creation of on DLT
review via audit software, reducing the time quarterly and annual filings, reducing •6 The bank provides tax accountants with
and resources required to perform these duplicate efforts authorized access to real‐time financial data
activities to facilitate tax calculations and automate
IRS tax payments
WORLD ECONOMIC FORUM | 2016 98
Automated Compliance
Critical conditions
Critical condition categories
Stakeholder
WORLD ECONOMIC FORUM | 2016 Technology Regulatory Governance 99
alignment
Automated Compliance
Conclusion
Summary Outlook
• Process automation: Audit examination activities are executed • Applications of DLT within automated compliance are currently
via automated audit software, dramatically reducing the time being explored at the proof‐of‐concept level with a number of
and resources required to perform the audit incumbents, focusing on:
‐ Continuous auditing
• Regulatory transparency: Audit officials are authorized access
‐ AML/KYC verification
to pertinent financial information to execute the audit
‐ Automated tax filing
examination
• Opportunities exist for FIs to reduce headcount and manual
• Cost savings: DLT can provide major cost savings in process
activities:
execution and reporting
‐ Eliminating planning/follow‐up activities
‐ Automating assessment/reporting activities
Key takeaways Unanswered questions
• Audit continuously: The convergence of automated audit • Continuous auditing: Will more frequent financial statement
software and access to real‐time financial information facilitate audits (potentially continuous) have adverse effects on investor
continuous auditing, which provides greater confidence in the decisions?
financial health of the organization
• Extract financial data: Financial information stored on a
distributed layer facilitates the automated execution of
additional compliance activities (e.g. CCAR, tax filing, etc.)
WORLD ECONOMIC FORUM | 2016 100
Section 5.7
Investment Management: Proxy Voting
WORLD ECONOMIC FORUM | 2016 101
Proxy Voting
Introduction
Current‐state background
Proxy voting facilitates remote investor voting on topics discussed during annual corporate shareholder meetings without requiring
attendance. To ensure investors are able to make an informed decision, corporations are responsible for distributing proxy
statements. Currently, a third party is responsible for delivering these statements to investors in partnership with intermediaries that
track order execution. Investors conduct a manual analysis before casting their vote directly to the third party.
Key ecosystem stakeholders Overview
• Retail investor participation is low compared to institutional investor
Regulator participation: On average, institutions voted 83% of their shares, while
Corporation
retail investors voted 28% of their shares1
• As a result, significant participation in elections is lacking each year:
From 1 July to 31 December 2015, approximately 24 billion shares
remained “un‐voted” as a result of this turnout1
• Efforts are being launched to improve retail participation: As investor
activism strengthens, leadership is recognizing the need to engage all
shareholders throughout the voting process
Third Party/ Investor
DLT has the potential to transfer value irrefutably. This use case highlights the
Intermediaries
key opportunities to improve retail investor participation in proxy voting
1. ProxyPulse: First Edition 2016, ProxyPulse.
WORLD ECONOMIC FORUM | 2016 102
Proxy Voting
Key market participants
The publicly traded entity that would like to improve proxy voting response rates
Corporation Core
by implementing a DLT solution
An individual and/or institution that participates in the voting process by receiving
Investor Core
proxy statements and casting a vote via phone, mail or online channels
Entities that facilitate the proxy voting process, while ensuring that statements are
Third Party/Intermediaries Supporting
distributed to all beneficial investors
A monitor who ensures proxy statements are distributed to all investors and the
Regulator Supporting
voting process is completed without any illegal or suspicious activity
WORLD ECONOMIC FORUM | 2016 103
Proxy Voting
Current‐state process depiction
4 5 6
or or 7
Online
1
Third party Online Mail Investors or Analyse potential Investors Third Results
voting impact or party released
2
Corporation Provide notice that
proxy statements are
Mail
Regulator accessible by investors
Current‐state process description
1 The corporation develops a proxy statement 4 Investors analyse the proxy statement to 5 Investors cast their vote directly to the third‐
internally in partnership with various teams, determine the potential impact of the votes party organization either online or by mail or
including general counsel and accounting being solicited during a corporation’s phone
shareholder meeting
2 The corporation simultaneously provides a 6 Results are not shared with investors or the
third‐party organization with the documents corporation throughout the voting process
to distribute to shareholders (via online and
7 During the shareholder meeting, votes cast
mail) and notifies the regulator that the by attendees are aggregated with those
proxy statement is available submitted by proxy and announced
3 The third‐party organization works with
intermediaries to obtain beneficial investor
information that may not be available
WORLD ECONOMIC FORUM | 2016 104
Proxy Voting
Current‐state pain points
5 7 8 9
or or
Online
2 6
Third party Online Mail Investors or Analyse potential Investors Third Results
voting impact or party released
3
Corporation Provide notice that
proxy statements are
Mail
Regulator accessible by investors
Current‐state pain points
1 Ambiguity: a single view into the total 4 Misleading representation: summaries 7 Minimal retail investor participation: in the
population of registered and beneficial within proxy statements can provide a United States (and other countries
investors does not exist without misleading view into a corporation’s health worldwide), a majority of shares owned by
intermediaries 5 Error prone: in some cases, minor data
retail investors go unvoted each year
2 Costly distribution process: since the online errors are uncovered by institutional 8 Lack of transparency: the corporation and
portal for statement distribution can only investors conducting detailed analyses voters do not receive insight into the process
occur if an investor has “opted‐in”, until they are made available by the third
6 Manual intensive process: given the length
significant print and mail expenses are and unstructured format of proxy party
incurred statements, investors have to manually 9 Voting discrepancies: the number of shares
Limited distribution: depending on the determine the information that will help held by investors may differ from the
3
market, proxy statements cannot be shared facilitate an informed decision number of votes cast; depending on the
with institutional investors, restricting the regulation, these votes are either adjusted
number of potential votes that can be cast or not counted
WORLD ECONOMIC FORUM | 2016 105
Proxy Voting
Future‐state process depiction
Future‐state process description
1 As orders are executed to invest in a 3 Investors analyse the proxy statement to 4 Investors cast their vote either online or by
corporation’s equity, DLT stores investment determine the potential impact of the votes mail or phone directly into the DLT as a
records including the number of shares being solicited during a corporation’s tokenized asset through back‐end
shareholder meeting through DLT’s transfer infrastructure integration
2 After a corporation has finalized its proxy
statement, a smart contract ensures that it is of value capability 5 A smart contract ensures votes are valid by
sent to all investors (via an online portal or comparing the number of votes cast to
mail) and the regulator is notified that the ownership data
documents are available 6 Results are shared with the corporation
and/or investors in real time or during a
shareholder meeting
WORLD ECONOMIC FORUM | 2016 106
Proxy Voting
Future‐state benefits
Future‐state benefits
1 Disintermediation: since all investment 3 Improved accessibility and participation: 5 Automated validation: smart contracts can
records are stored on DLT, partnerships with DLT can increase the mechanisms that can ensure that voting is aligned to share
a third‐party organization and intermediaries be used to access proxy statements (e.g. ownership at the time of the vote
are not required; a smart contract can notify native mobile applications) 6 Increased transparency: depending on
regulators of proxy statement availability 4 Future automated analyses: in the proposed requirements, voting data could be made
and ensure distribution to investors future state, the current proxy statement available to the corporation and/or voters in
2 Streamlined distribution process: DLT can format will continue to be distributed to real time
reduce the costs associated with printing investors, but future implementation can 7 Improved accessibility and participation:
and mailing proxy statements (difficult to enable investors to conduct personalized, DLT can increase mechanisms used to cast
compute savings since investor must “opt‐ automated analyses votes (e.g. native mobile applications)
in”)
WORLD ECONOMIC FORUM | 2016 107
Proxy Voting
Critical conditions
Critical condition categories
Stakeholder
WORLD ECONOMIC FORUM | 2016 Technology Regulatory Governance 108
alignment
Proxy Voting
Conclusion
Summary Outlook
• Streamlined distribution: Smart contract technology reduces • Applications of DLT within proxy voting are currently being
manual processes associated with proxy statement distribution, explored at the proof‐of‐concept level by incumbent
reducing the time and manpower required to perform the exchanges:
process ‐ NASDAQ
• Automated reconciliation: Smart contract technology prevents • Opportunities exist for FIs to improve participation and
investors from casting more votes than the shares they own accessibility to:
and provides real‐time updates for error correction, potentially ‐ Proxy statements
increasing the total number of counted votes ‐ Vote casting mechanisms
Key takeaways Unanswered questions
• Ensure voting transparency: The potential exists for DLT to • Cost vs benefits: When voting operations are executed faster
provide a transparent view of voting data during annual and at lower cost, will voting frequency increase? Additionally,
shareholder meetings will this change the relationship between companies and
activist investors?
• Provide central authority disintermediation: Investment
records stored on the distributed ledger and proxy statements
disseminated via smart contract technology eliminate the need
for third‐party intermediaries and associated fees
WORLD ECONOMIC FORUM | 2016 109
Section 5.8
Market Provisioning: Asset Rehypothecation
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Asset Rehypothecation
Introduction
Current‐state background
Asset rehypothecation is a common practice in which FIs securitize existing collateral to reduce the cost of pledging collateral in
subsequent trades. As assets are rehypothecated, ownership structures and asset composition can become ambiguous due to the
lack of clear transaction and ownership history, exacerbating counterparty risk and asset valuation uncertainty. Regulatory constraints
are designed to limit the extent to which an asset can be rehypothecated, but without a mechanism for tracking transaction history,
enforcement is not possible.
Key ecosystem stakeholders Overview
• The secondary trading market is large: Secondary trading has become an
extremely common practice, driving its volume in the US loan market to
Broker/Dealer US$ 628 billion in 20141
• Secondary market trading is increasing: Although the secondary trading
Regulator
market is already substantially large, it continues to grow; between 2013
and 2014 secondary trading volume increased by 21%1
Buying Selling
Investor Investor DLT has the potential to optimize the regulatory components of asset
rehypothecation. This use case highlights the key opportunities to improve
information transfer in the end‐to‐end broker/dealer process
1. 4th Quarter 2014 Secondary Trade Data Study,
WORLD ECONOMIC FORUM | 2016 The Loan Syndications and Trading Association. 111
Asset Rehypothecation
Key market participants
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Asset Rehypothecation
Current‐state process depiction
The customer maintains possession of the home
Current‐state process description
1 A customer acquires a loan 4 The bank securitizes a portion 6 The investment bank 8 The hedge fund uses a
from a bank to purchase a (75% within the example) of the repackages the debt obtained broker/dealer to sell a
home mortgage debt along with other (75% of 75% within the derivative in over‐the‐counter
mortgages and sells it to an example) into a security (e.g. markets, where the underlying
2 In exchange, the customer
provides the bank with the investment bank mortgage‐backed), which is asset is the rehypothecated
house as collateral and further divided into tranches percentage obtained (100% of
5 The investment bank now has
authorizes rehypothecation to 75% of the house value in and sold to a hedge fund based 75% of 75% within the example)
improve the rate collateral that can be used in on its risk appetite 9 The ownership and collateral
subsequent trades The hedge fund has now value becomes ambiguous,
3 During the mortgage repayment 7
period, the bank may use the secured 56.25% of the original creating a scenario where the
house as collateral in house value (that can be used in total value pledged far exceeds
subsequent transactions subsequent trades) origination
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Asset Rehypothecation
Current‐state pain points
The customer maintains possession of the home
Current‐state pain points
1 Lack of regulatory reporting: 2 Counterparty risk: investors 4 Security value ambiguity: since 5 Systematic failure: if default
within secondary trading lack insight into additional a detailed transaction history is occurs with any of the players, a
markets, reporting counterparties with ownership not maintained, each trade part or even the entire
requirements do not detail the claims to the asset leveraging a percentage of the transaction chain is affected,
transaction history of the asset collateral makes it more difficult which may have unintended
3 Lack of transparency:
(e.g. purchase price, purchase regulators do not have the to determine the true value of consequences on adjacent
date and loan originator) or ability to track securities as they the asset operations in the financial
other counterparties with are rehypothecated in the system
claims to the asset market, making enforcement of
regulator limits nearly
impossible
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Asset Rehypothecation
Future‐state process depiction
The customer maintains possession of the home
Future‐state process description
1 Collateral obtained by the bank 3 In subsequent trades, the smart 5 Regulators receive authorized 6 The smart contract restricts the
is tokenized to record the contract broadcasts the real‐time access to view the additional hypothecation of the
transaction history of the transaction history details (e.g. transaction details and monitor asset once predetermined
underlying asset on DLT collateral value and regulatory infractions regulatory rehypothecation
2 A smart contract encapsulates counterparty information) to limits are met
the tokenized collateral and participating entities
facilitates record‐keeping and 4 Investors receive a transparent
the transfer of value view of the asset history along
with associated counterparty
information (via the
counterparty rating system) to
enhance trade decisions
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Asset Rehypothecation
Future‐state benefits
The customer maintains possession of the home
Future‐state benefits
1 Transparency: the collateral 3 Automated processing: DLT 5 Automated enforcement: a 7 Disintermediation: a smart
value, risk position and increases processing efficiency, smart contract ensures assets contract facilitates the
ownership history are reducing manual processes and are not rehypothecated over movement of funds and assets,
transparent to investors, aiding associated costs regulatory limits eliminating the need for costly
in investment decision‐making 4 Embedded regulation: 6 Financial stability: the intermediaries
2 Counterparty risk: regulators maintain a clear view enforcement of regulatory
counterparties are rated based of the asset history (e.g. value, controls and the transparent
on transaction history, enabling ownership and risk position), transaction history greatly
investors to hedge their risk by enabling the enforcement of reduce the risk of systematic
selecting a counterparty that regulatory constraints failure in the event of default
best fits their risk profile
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Asset Rehypothecation
Critical conditions
Critical condition categories
Stakeholder
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alignment
Asset Rehypothecation
Conclusion
Summary Outlook
• Asset tokenization: Collateralized assets are tokenized and • Applications of DLT within asset rehypothecation are currently
stored on the distributed ledger where transaction history being explored at the proof‐of‐concept level with a number of
details are stored in perpetuity incumbents, focusing on:
‐ Gold markets
• Regulatory transparency: Compliance officials maintain a real‐
‐ Repurchase markets
time view of asset transaction history (value, ownership, risk
‐ Asset transfer
position) to assist in the enforcement of regulatory control
limits • Opportunities exist for counterparty risk reduction and
enhanced regulatory enforcement tools:
• Collaboration: successful implementation of DLT would require
‐ Counterparty rating system
a significant amount of standardization and normalization of
‐ Asset transaction history storage
static data between market participants
‐ Regulatory transparency
‐ Smart contract enforcement
Key takeaways Unanswered questions
• Reduce counterparty risk: The transparent view of asset • Asset history tokenization: Identifying asset value, ownership
history (value, ownership and risk position), coupled with a and risk position is a major challenge in today’s financial
counterparty rating system, assists investors in aligning their system, so how will this issue be resolved so that transaction
risk appetite with potential trade partners histories can be stored on the ledger?
• Financial system stability: smart contract technology • Will regulators require OTC markets to comply with this
terminates trades that violate regulatory controls, reducing the implementation?
propensity of systemic failure within the financial system and
improving collateral management
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Section 5.9
Market Provisioning: Equity Post‐Trade
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Equity Post‐Trade
Introduction
Current‐state background
Equity post‐trade processes enable buyers and sellers to exchange details, approve transactions, change records of ownership and
exchange securities/cash. These processes are initiated after an investor receives confirmation of an executed trade from the
exchange. Central Securities Depositories (CSDs), working in partnership with custodians, match trades and validate investor
credentials. After successful validation, Central Clearing Counterparties (CCPs) net all transactions and transfer cash/equity to all
involved custodians. Custodians store assets in safekeeping accounts in partnership with CSDs, who are responsible for initiating asset
servicing (e.g. income distribution and proxy voting) as required.
Key ecosystem stakeholders Overview
• Significant volume exists within the equity market: The NYSE, for
Custodian Bank
example, processes millions of trades and billions of shares each day1
• Processes are time‐intensive: Following confirmation of a trade, post‐
trade settlement and clearing processes take anywhere from one to three
Investor days to complete (depending on the market)
• Intermediaries are costly: Within the United States, banks, central
Exchange agency bodies and intermediaries generate approximately US$ 9 billion in
various post‐trade activities2
Central
Securities
Central Depository
Clearing DLT has the potential to improve the efficiency of asset transfer. This use case
Counterparty highlights the key opportunities to streamline clearing and settlement
processes in cash equities
1. NYSE: Transactions, Statistics and Data Library, 2016.
WORLD ECONOMIC FORUM | 2016 2. Charting a Path to a Post‐Trade Utility, Broadridge, 2015. 120
Equity Post‐Trade
Key market participants
An entity that investors use to place trades with the exchange, and that manages
Custodian Bank Core
post‐trade processes and stores assets for servicing
An individual or organization that instigates equity post‐trade processes by
Investor Core
initiating a trade
Central Securities The entity that supports matching trade sections prior to settlement and facilitates
Core
Depository asset servicing processes
Central Clearing The central body that manages counterparty credit risk during settlement by
Core
Counterparty acting as the buyer to the seller and vice versa to the buyer
The entity that matches equity “buy” and “sell” orders on behalf of investors, and
Exchange Supporting
confirms them prior to successful post‐trade processes
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Equity Post‐Trade
Current‐state process depiction
SELL 100 3
Investor 1 2 Investor 1 Custodian 1 CSD Custodian 1 5 CCP 6 Custodian 2 Investor 1 Investor 2 Investor 3
7
Trade date/
Bank 1 details Safekeeping accounts
SELL 100 Settlement
Investor 2 Exchange Investor 2 Custodian 1 date Investor 1 Investor 3
Counterparty
BUY 100 bank details Custodian 1 CSD Custodian 2
Cash 8
* Trade commitments Distribute Corporate Proxy
Bank 2 Investor 3 confirmation Investor 3 Custodian 2 Investor 2 income actions statements
Validation
Current‐state process description
1 Investors use interfaces 3 Utilizing securities settlement 5 After matching all sections of 7 After the required assets are
provided by the bank of their systems, custodian banks send the trade, CCPs determine the transferred, equity and cash are
choosing to place equity trade their section of the trade details “net transaction” across all stored in safekeeping accounts
orders through the exchange to the CSD on behalf of the trades and custodian banks to managed in partnership by
2 The exchange is responsible for investor minimize the number of custodian banks and the CSD
matching the equity trade required transactions
4 The CSD is responsible for 8 As various servicing processes
orders placed by investors validating the trade details 6 The simultaneous transfer of occur, third parties work
across banks in order to confirm provided by all custodian banks equity and cash is managed by directly with the CSD to ensure
trades in real time and initiate (e.g. cash commitments and the CCP between custodian custodian banks and, ultimately,
post‐trade processes settlement date) and matching banks on behalf of all involved investors are engaged
all sections of the trade investors
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Equity Post‐Trade
Current‐state pain points
SELL 100 3
Investor 1 1 Investor 1 Custodian 1 CSD Custodian 1 CCP Custodian 2 Investor 1 Investor 2 Investor 3
6
Trade date/ 4
Bank 1 details Safekeeping accounts
SELL 100 Settlement
Investor 2 Exchange Investor 2 Custodian 1 date Investor 1 Investor 3
Counterparty 5
BUY 100 bank details Custodian 1 CSD Custodian 2
Cash 7
* Trade commitments Distribute Corporate Proxy
Bank 2 Investor 3 confirmation Investor 3 Custodian 2 Investor 2 income actions statements
Validation
Current‐state pain points
1 Duration between trade 2 Inconsistent data: as a result of 4 Operational risk: CCPs must 6 Safekeeping account
execution and settlement: frequent changes to account for the possibility that complexity: since securities
despite investors being able to counterparty bank details, CSDs technology and/or manual settlement systems connect
see traded assets in their must manually validate a errors result in inaccurate safekeeping accounts across
account shortly after receiving number of transactions prior to settlement custodian banks at the CSD,
confirmation, settlement occurs settlement 5 Settlement ambiguity: custodians have limited
t+3, which limits the actions 3 Counterparty risk: custodians investors are inconsistently flexibility to store assets
that investors can take in the must account for the possibility notified when their trades settle 7 Costly intermediaries:
interim that a counterparty is unable to depending on custodian corporations must involve third
settle when due procedures parties and intermediaries to
initiate asset servicing
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Equity Post‐Trade
Future‐state process depiction
SELL 100 3 5 6
Investor 1 2 Investor 1 Custodian 1 Smart Custodian 1 Smart Custodian 2 Investor 1 Investor 2 Investor 3
8
contract contract
Bank 1 Safekeeping
SELL 100 Trade date/ accounts
Investor 2 Exchange Investor 2 Custodian 1 details
Investor 1 Investor 3
Counterparty
BUY 100 details Custodian 1 Custodian 2
Cash Trade 7 9
* Trade commitments confirmation Distribute Corporate Proxy
Bank 2 Investor 3 confirmation Investor 3 Custodian 2 Investor 2 income actions statements
Validation
Future‐state process description
1 Similar to the current state, 3 Custodian banks send their 5 After matching all sections of 8 After required assets are
investors use the interfaces section of the trade details to the trade, a smart contract transferred, equity and cash are
provided by the bank of their the DLT on behalf of the determines the “net stored in safekeeping accounts
choosing to place equity trade investor transaction” to minimize the managed solely by custodian
orders through the exchange 4 A smart contract validates the number of required banks
2 The exchange is responsible for trade details provided by all transactions 9 As various servicing processes
matching the equity trade custodian banks (e.g. cash 6 Smart contracts ensure the occur, smart contracts notify
orders placed by investors commitments and counterparty simultaneous transfer of equity custodian banks and investors
across banks in order to confirm details) and matches all sections and cash between custodian in real time
trades in real time and initiate of the trade in real time banks on behalf of all investors
post‐trade processes Confirmation is stored in the
7
DLT to facilitate future
processes
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Equity Post‐Trade
Future‐state benefits
SELL 100 3 4
Investor 1 2 Investor 1 Custodian 1 Smart Custodian 1 Smart Custodian 2 Investor 1 Investor 2 Investor 3
6
contract contract
Bank 1 Safekeeping
SELL 100 Trade date/ accounts
Investor 2 Exchange Investor 2 Custodian 1 details
Investor 1 Investor 3
Counterparty
BUY 100 details Custodian 1 Custodian 2
Cash Trade 5 7
* Trade commitments confirmation Distribute Corporate Proxy
Bank 2 Investor 3 confirmation Investor 3 Custodian 2 Investor 2 income actions statements
Validation
Future‐state benefits
1 Reduced settlement time: 2 Standardized data 4 Reduced operational risk: 6 Reduced account complexity:
through downstream, post‐ requirements: standardizing through the use of a smart custodians will be able to store
trade automation and efficiency data fields for trade matching contract to transfer equity and assets with greater flexibility
enhancements, settlement improves the efficiency of cash, the likelihood of since integration with securities
could potentially be reduced to existing clearing processes technology and/or manual settlement systems will no
real‐time settlement, trade date 3 Reduced counterparty risk: 5 errors is decreased longer be required
plus one day or trade date plus through automated validation, Real‐time confirmation: by 7 Servicing disintermediation:
two days custodians benefit from the storing trade confirmations on servicing activities initiated via a
reduced likelihood that the DLT, investors can receive smart contract eliminate the
counterparty is unable to settle notification of settlement need for third‐party
without relying on a custodian intermediaries
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Equity Post‐Trade
Critical conditions
Critical condition categories
Stakeholder
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alignment
Equity Post‐Trade
Conclusion
Summary Outlook
• Process automation: Clearing, settlement and servicing • Applications of DLT within equity post‐trade are currently being
activities are executed via automation, dramatically reducing explored at the proof‐of‐concept level with a number of
the time and resources required to perform these processes incumbents and FinTechs, focusing on:
‐ Private equity trading
• Reduced settlement time: Smart contract technology facilitates
‐ Clearing and settlement solutions
customizable settlement timelines (real‐time settlement, trade
date plus one day, trade date plus two days), reducing the time • Opportunities exist for FIs to reduce costs and improve
it takes to exchange assets operational efficiencies:
‐ Eliminating fees through disintermediation
• Cost savings: DLT can provide a global cost reduction
‐ Executing clearing and settlement via smart contract
opportunity associated with process execution and fee
reduction
Key takeaways Unanswered questions
• Reduce operational risk: Simultaneous settlement of cash and • Real‐time settlement: Will the savings associated with
equity executed via smart contract reduces the likelihood of transitioning to faster settlement meet or exceed the value of
manual errors and the resources required to execute the “float” revenues earned today by holding assets during the
process settlement period?
• Provide central authority disintermediation: Settlement and • What are the settlement implications of operating a “slow lane”
servicing activities are executed via smart contract, eliminating and “fast lane” (i.e. real‐time settlement and trade date plus
costly fees three days)?
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Section 6
Contact Details
For additional information, please contact:
WORLD ECONOMIC FORUM PROJECT TEAM PROFESSIONAL SERVICES LEADERSHIP FROM DELOITTE
R. Jesse McWaters Rob Galaski
Project Lead, Financial Services Deloitte Canada
World Economic Forum rgalaski@deloitte.ca
jesse.mcwaters@weforum.org
Soumak Chatterjee
Giancarlo Bruno Deloitte Canada
Senior Director, Head of Financial Services Industries schatterjee@deloitte.ca
World Economic Forum
giancarlo.bruno@weforum.org
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