Technology

How Blockchains Benefit Financial Services


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No Need to Reconcile Data Externally
Blockchain technology improves efficiency when financial entities are reconciling trades. Reconciling trades against an external party (whether that's the trading counterpart or an industry third party) has drag and inefficiencies due to system incompatibilities and processes. A blockchain with a distributed data base will mean that the agreed trade data is already in-house, removing the need to reconcile externally(third party), as the blockchain has already done that in real time.

Using "smart contracts" to Speed up Payments
The use of blockchains can also help speed up payments between financial entities. If parties can agree upfront on the payoffs (usually this is agreed in term sheets written in dry legal language) and can encode the payoff terms into the trade details itself, then there can be efficiencies when trade lifecycle events take place, including error reduction and speed increases. These code snippets saved onto blockchains are called "smart contracts".

A Real Time View of the Trades
With trade data published to a common platform, regulators or other interested parties can plug into this and get a real time view of the trades. This gives regulators oversight into one common source, rather than receiving reports in different formats at different times from each institution. The transparency offered by blockchains helps regulators detect systemic risks sooner.

Computer Coded "Smart" Contracts
Traditionally for trade payoffs, entities had to rely on heavy legal documentation, such as International Swaps and Derivatives Association (ISDA) master agreements. But computer code, by its very nature, is far more readable and predictable than legal language. By writing payoff structures onto a common platform in computer code which can be tested against, a smart contract on a blockchain provides for much higher levels of transparency over outcomes.

Governance and Trust
In a blockchain system, a majority of participants need to agree on data being added before it becomes part of the definitive blockchain. This is very different to central, often secretive ledgers held and controlled centrally. When multiple parties have a say over what data is written, the ability to alter data, or remove dubious data, it creates a more honest system.

Current Methods are Prone to Data Corruption
A centrally cleared, OTC trade like an interest rate swap, can last many years. These transactions are calculated multiple times in multiple systems and recorded in multiple ledgers. The current methods of reconciling separate ledgers are prone to breaks, missing information, and calculation differences. This leads to different versions of the events in different bank systems, increasing risk and associated time wasted investigating the source of these discrepancies.

One Event, One Version
In a blockchain system, each event exists as one single version of the event stored onto a database and distributed to relevant parties. The blockchain consensus mechanism aligns all the entities to have the same view of the event. This happens without a third party, and it is enabled by protocols that ensure that each entity independently checks that data conforms to the technical and business rules that they originally agreed upon.

No Need for Third Parties
Blockchain technologies can negate the need for third parties to be involved in this kind of data management. This can be used for something as trivial as agreeing foreign exchange (FX) settlement holidays (the days on which specific currencies don't settle) through to having an industry view of counterparty data, which can be selectively revealed to trading counterparties.