Following the launch last week of the first structured notes through the new ResonanceX mulit-issuer platform which were settled and cleared on the public Ethereum blockchain (as opposed to the traditional European clearing house, Clearstream), SRP spoke to Hariton Korizis (pictured), head of structured products at fintech Nivaura, Nilesh Jethwa, Marex Solutions' chief executive officer, and Guillaume Chatain, CEO and founder of ResonanceX. In the first of three interviews, SRP spoke to Nivaura about how the flow of assets and money is simplified by using blockchain.
The exact reason why one note was executed on a traditional clearing and settling house as a control case and another via blockchain as an experimental case, is that executing with real client money and under the supervision of the UK Financial Conduct Authority (FCA) is the only way to demonstrate the real and practical efficiencies and the affect on the wider structured products market, according to Korizis. "We have developed technology to simplify and automate the operation of the distribution, issuance and management of the full lifecycle of a structured product," said Korizis. "Our focus is vertical integration in the capital markets, and doing so while ensuring regulatory compliance and seamlessly connecting to all the necessary internal systems or external service providers."
Structured products is a complex business, due to fragmented legacy IT systems and the necessary flexibility and variety of solutions offered to investors, according to Korizis. "Even though every aspect of our lives has been affected by the huge technological leaps of the past two decades, the day-to-day tools for this business have not dramatically improved," said Korizis. For a typical private placement, the process still involves approximately 40 different steps, 20 documents that need to be drafted and agreed (and some signed), 10 different spreadsheets (client lists, fee blotters, among others), at least 10 different fragmented IT systems, and even courier trips to obtain manual signatures in some jurisdictions, according to Korizis.
"Technology can massively simplify the structured products workflow, making it cheaper, faster and safer," said Korizis. "It opens up more opportunities for agile firms to compete and innovate, while they provide the best possible service to their clients at the same time."
Nivaura is an FCA-regulated technology provider for financial services and offers white-labelled technology to businesses, which "can be tailored to the client's needs giving them control to expand their product offering and innovate", said Korizis. "Before expanding the product offering or venturing to a new area, there is an onerous process of identifying all potential impacts in a long and usually bureaucratic process," said Korizis.
The company's technology, along with a powerful user interface, can be customised and integrated as an application within an existing infrastructure or can be deployed as a fully-fledged structured products infrastructure solution, according to Korizis. "Ultimately, we are providing the infrastructure to plug in everything together, along with custody and clearing services. Being cloud-based means that it can be rapidly deployed on Nivaura's or clients' clouds," said Korizis.
The increasing regulatory requirements for the onboarding and marketing processes are a stress point, with the new Priips Key Information Document now an obligation, according to Korizis. "Technology can address these challenges here too, with automated document generation," said Korizis. "Technology helps through standardisation and generation of the necessary documentation on-the-fly. Combining this capability with fully auditable channels to distribute products, interact and educate investors provides immense value."
Blockchain could be a game-changer for the whole industry and a way to address regulatory issues around transparency and sales practices which have tarnished the market's reputation, according to Korizis. "The number of banks researching distributed ledger technology to simplify the way securities are traded, settled and recorded serves also as a testimony to this trend," said Korizis.
Nivaura demonstrated, for the first time, how blockchain can be used to issue, clear and settle a financial instrument outside the traditional system, while satisfying regulatory requirements and being legally enforceable.
The world's first cryptocurrency-denominated bond issuance that cleared, settled and was registered on an open public blockchain (Ethereum) was executed in November 2017. From a regulatory perspective, the FCA was satisfied that the public blockchain can fill the role of an independent third party registering the allocation of assets and money, according to Korizis. "Despite the hype around blockchain in the media, it is essentially an infrastructure that simplifies the flow of assets and money, resulting in an improvement of the speed, cost structure and transparency," said Korizis. "Investors gain from such benefits, as well as from the resulting lower minimums required for new products to be issued. Their experience, however, should not be different between the two clearing methods."
Nivaura also powered the world's first structured product which was "transacted and custodied" using blockchain. The two principal protected notes were issued to retail investors and had identical investment terms. The first one centrally cleared and settled via Clearstream, and the latter on the Ethereum open public blockchain. "This allows us to clearly identify the differences between these two methods for the first time within the controlled environment of the FCA Sandbox, and demonstrate the real-world impact of this exciting technology," said Korizis. "We find that not only is it cheaper and faster to issue a product on the blockchain, but also it provides enhanced compliance and accountability."
An issuer can offer clearing and settlement on the execution day (T+0), essentially at the block delay time of the blockchain of choice, according to Korizis. "So far, we have transacted on the Bitcoin and Ethereum open public blockchains, but have developed a proprietary toolkit to deploy our technology on any kind of public or private blockchain," said Korizis.
However, there are challenges before blockchains can be commercially adopted in capital markets, with the most prominent scalability, according to Korizis. "The time taken to include the next block in the blockchain (block delay time) and the number of transactions that can fit in a block at any time (throughput) are still not on par with the needs of the industry," said Korizis. "We must, however, keep in perspective that this technology is still in its infancy and is being continuously improved."
Historically, "much-needed efficiency-enhancing technologies" were adopted faster than anticipated, according to Korizis. "Vertically-integrated, end-to-end automation is something truly awesome for the structured products business, as it allows all this brainpower involved in that business to do what they do best: focus their energy on best servicing the needs of their clients and keep innovating, in a safe and compliant manner," said Korizis.
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