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Credit Suisse leads HSBC, Citi, and AllianceBernstein to develop blockchain solutions for financial reference data

Seven financial institutions, including Credit Suisse, Citi, and HSBC, have collaborated “to explore how blockchain technology could simplify reference data processes.” The companies are working with blockchain technology company R3 CEV and capital markets blockchain infrastructure provider, Axoni.

Seven financial institutions, including Credit Suisse, Citi, and HSBC, have collaborated “to explore how blockchain technology could simplify reference data processes.” The companies are working with blockchain technology company R3 CEV and capital markets blockchain infrastructure provider, Axoni.

Led by Credit Suisse, the group recently completed a distributed ledger prototype proof of concept (PoC). The aim is to “enhance the risk management, cost and efficiency issues inherent in managing financial reference data,” according to the announcement.

credit suisse logo“Our vision is to demonstrate how distributed ledgers applicability can go beyond settlement and help reduce duplicate reference data costs and improve data latency which will ultimately lower costs and reduce operational risks.”
— – Emmanuel Aidoo, Credit Suisse, Head of Distributed Ledger and Blockchain effort

While market data is price and trade-related data for a financial instrument, reference data is used to complete and settle financial transactions. Reference data may include counterparty information, financial product specification, issuer detail, currencies, financial market information, corporate actions, and prices.

According to Capgemini, reference data makes accounts for 40% to 70% of the data used in all financial transactions. However, the percentage rises to 70% for capital market transactions. “Faulty reference data is the major component of operational risk,” states the French multinational management consulting corporation. “Misidentified products or data mismatching can cause transaction failures,” the firm asserted, adding that “Faulty reference data may also lead to systemic failure.”

A whitepaper published in February commissioned by SWIFT’s reference data service, SWIFTRef, describe the inherent problem with banking applications that are so reliant on reference data. “They need to be efficiently connected to a centralized database to benefit from any data cleansing and management work that goes on,” the report states.

SWIFT Logo“Spending on reference data management is gradually rising year on year in response to business, regulatory, and risk-management pressures, not least of which is the steady rise in the volume of data that must be managed and maintained for compliance purposes.”

The results of a survey by Accenture, released in July, also describe a rising cost of reference data. The firm found that external data licensing for vendors and exchanges makes up 33 percent of the overall reference data spend, which totals over US$2 billion across the industry.

According to the study,  conducted amongst 133 buy- and sell-side professionals globally, 70 percent of respondents are concerned about data quality and increasing costs. Almost half of them expect costs to increase “as data demands rise and providers become stricter with their licensing.” The firm concluded that “the old models of business alignment and cost containment for reference data management are less than optimal and negatively impacting banks return on equity.”

Expectations are also increasing. A December 2015 report by Deloitte, on developments in data management, describes user expectations regarding reference data. The firm outlines four main expectations; data quality and transparency, data customization and reporting, independence, and quick data production through automated processes.

Oliver Wyman and Euroclear proposed that blockchain technology adoption could benefit capital markets in a report last February. Reference data sources in capital markets are agreed bases for calculating derivative positions and obligations, the report explains. Murray Pozmanter, of the Depository Trust & Clearing Corporation (DTCC) echoed the sentiment in April.

DTCC logo“When you think of the amount of over-processing and inefficiency that there is in the industry just because of different reference data or inaccurate reference data, not just from firm to firm but even within different systems within the same firm, it seems to be a natural spot to introduce distributive ledger technology as even the low-hanging fruit to get started.”
— – Murray Pozmanter, Depository Trust & Clearing Corporation

Tuesday’s announcement explains that reference data requires constant maintenance as reference entity names, counterparties, and securities data change over time, “Lack of automation and a reliance on legacy systems and processes currently require each institution to keep its own record of reference data.”

Goldman Sachs, JPMorgan Chase, Morgan Stanley, and SmartStream tried tackling the problem in October 2015 with Securities Product Reference Data, or SPReD, a reference data utility. Its function is to normalize and validate data across asset classes. “Blockchain technologies can negate the need for third parties to be involved in this kind of data management,” states DBS Bank Ltd, a Singaporean multinational banking corporation.

The newly announced prototype will use Axoni’s proprietary blockchain software, called Axoni Core. It aims to “simulate the collaborative management of reference data, as well as the use of that reference data for corporate bond issuance.”

Founded in 2013 but formally launched in March, Axoni is a capital markets technology company specializing in blockchain applications. The New York-based startup has been working with ICAP, a UK-based markets operator and post trade risk mitigation provider, to transform the post-trade landscape. Also in March, the company participated in a post-trade life cycle trial, in collaboration with major companies including Bank of America, Citi, Credit Suisse, JPMorgan and DTCC.

Axoni COO Thomas Chippas states that this project “demonstrates distributed ledger technology’s value in financial markets beyond commonly-discussed use cases such as trade settlement and cash movement.”

Axoni Logo“A reliable, distributed, synchronized reference data store will eliminate vast amounts of expensive, replicated infrastructure and workflows across industry participants.”
— – Thomas Chippas, Axoni COO

The Securities Industry and Financial Markets Association (SIFMA) helped to coordinate testing of the prototype. Founded in 1912, SIFMA represents securities firms, banks, and asset management companies, serving clients with over US$20 trillion in assets and managing more than US$67 trillion in assets.

All financial services firms involved in this blockchain project are members of SIFMA. The organization will continue to work with its members “to review the potential application of blockchain technology in reference data,” according to the announcement.

R3 CEV also has a broad and deep membership. Operating in New York, London and San Francisco, the consortium includes 61 of the world’s largest financial institutions. It aims to develop blockchain commercial applications for the financial services industry.

“Quality of data has become a crucial issue for financial institutions in today’s markets. Unfortunately, their middle and back offices rely on legacy systems and processes – often manual – to manage and repair unclear, inaccurate reference data,” says David Rutter, R3 CEO. Blockchain technology removes the need to reconcile multiple copies of data, therefore solving the problems “currently caused by these legacy systems and processes,” he added.

However, applying Blockchain technology to reference data is still in its infancy. The announcement describes an “exploratory exercise,” designed to encourage greater review and analysis of how distributed ledger technology could be used to enhance financial services operations.


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