Both come with claims of operational efficiencies through a single indisputable source of data that reduces the potential for processing errors.
BNP Paribas Securities Services project for corporate action notifications and Broadridge’s initiative for bilateral repurchase agreements were among several announced at SWIFT’s annual SIBOS gathering in Toronto this week. Top brass of the global messaging network giant held a center-stage discussion of its blockchain pilot for international payments, trying to prevent rival Ripple from stealing the limelight with its own event in the same city.
First announced in January 2017 as part of SWIFT’s global payments innovation initiative, the SWIFT proof of concept uses the Hyperledger Fabric system to simulate the movement of funds from multiple accounts to a distributed ledger. The simulation, say SWIFT officials, provided users with increased visibility and access to available funds as well as a simplified reconciliation process.
Distributed ledger technology (DLT), or blockchain, relies on encrypted data and distributed computing to produce unchangeable records shared by all parties. Custodian banks and other asset-servicing specialists are trying to integrate blockchain into their business model, rather than face the prospect of outright extinction. Smart contracts on blockchain, they worry, could easily replace asset safekeeping, investor recordkeeping, and other functions. Still undetermined is whether blockchain can sustain security breaches and high volume traffic.
French banking giant BNP Paribas says that its new Corporate Event Connect service will reduce the potential for misunderstandings by creating a single centralized source of data that can be quickly distributed to numerous internal applications. The asset servicing arm of BNP Paribas will continue to rely on its own branch network, third-party subcustodians and data vendors for information on corporate action events which range from income and dividend payments to complex corporate reorganizations. However, instead of reformatting the corporate action event information into SWIFT 15022 message protocol, the bank will store the data on the Quartz platform licensed from Tata Consultancy. TCS Quartz is embedded in the vendor’s core banking system TCS BaNCs.
“Storing corporate actions data on the blockchain will allow all of the units of BNP Paribas to access notifications simultaneously rather than having to wait for several hours,” explains Bruno Campenon, director of custody and clearing for the Americas at BNP Paribas Securities Services. “The blockchain will also allow more units of BNP Paribas — such as part of the investment banking division and the securities lending department — to rely on the same data collected at corporate headquarters in Paris rather than source the data on their own.”
Securities lending desks need to keep close track of corporate action events, so they won’t distribute a payment to the wrong participant in the repo deal. When that happens, financial firms are forced to either file or process cumbersome claim forms to reallocate the payment.
Campenon says that once the blockchain implementation has been developed for internal clients over the next 18 months, BNP Paribas will roll it out to customers. An additional use of the blockchain, he believes, could be to share data on corporate action events with rival custodian banks in a “utility-like model.” Relying on a larger number of data sources will ultimately improve data quality and reduce data cleansing costs.
Consolidating Collateral Info
Broadridge’s blockchain pilot with French banks Natixis and Societe Generale recorded the details of a bilateral repurchase agreement on Ethereum’s Fabric 1.0 platform. Broadridge developed the application and hosted the technology stack and nodes on behalf of the banks. Over the course of testing, the participants loaded their collateral details onto distributed ledger platform, executed mock trades, and accepted, rejected or modified the terms of the bilateral repo trades. The pilot included rerates, pricing, collateral substitution, and the return of collateral.
“The benefits of this pilot include operational efficiencies, reduced counterparty risk and increased auditability of contracts,” says Horacio Barakat, vice president of corporate strategy for Broadridge. “Given the distributed nature of the solution and the fact that participants — the lenders and borrowers — interact on a single source of truth of collateral there is no need for reconciliation over who has rights to that collateral. ”
The pilot relied on government securities as collateral, but Broadridge anticipates expanding to other asset classes to provide increased lending liquidity. Barakat says that Broadridge is also working with another unnamed US bank to expand the pilot to collateral management. “This [the pilot] is the first step towards a longer roadmap towards collateral management. It will require expansion of the functionality and broadening of the number of participants,” he explains.
The announcements by BNP Paribas and Broadridge are the latest in a string of industry revelations about the use of blockchain technology far beyond its origins in the Bitcoin currency. In February, the US Depository Trust & Clearing Corp. said it completed a proof of concept designed to improve the netting process for repo transactions using blockchain. In March, Switzerland’s SIX Securities Services revealed it had developed a blockchain-powered service covering the full bond trading cycle from issuance to settlement. The following month, Broadridge successfully completed a global proxy voting test with custodians Banco Santander, Northern Trust and JP Morgan Securities.
Earlier this month, BlackRock disclosed it will test a private blockchain platform called Aladdin Provider with its custodian bank partners. The world’s largest manager says that the initial incarnation of the platform will allow it to simplify its trading and trade entry compliance functions. It plans to expand the platform beyond custodian bank users to BlackRock clients.