R3 and Axoni, along with seven buy and sell side firms, are working to explore ways that blockchain technology can be used to simplify reference data processes.
The group, which includes Alliance Bernstein, Citi, Credit Suisse and HSBC, recently completed a multi-month proof of concept (PoC) exercise aimed at building a distributed ledger prototype that can enhance the risk management, cost and efficiency issues inherent in managing financial reference data.
The prototype was created using Axoni Core, the firm’s proprietary distributed ledger software, to simulate the collaborative management of reference data, as well as the use of that reference data for corporate bond issuance.
The technology is designed to enable participants to interact with reference data after issuance, with any proposed changes requiring validation by the underwriter to ensure the ledger provided a single, immutable record of all data related to the bond.
R3 says that a lack of automation and a reliance on legacy systems and processes currently require each institution to keep its own record of reference data, introducing inconsistencies and requiring resources for reconciliation.
Meanwhile, new and emerging regulations such as Emir in Europe and the Dodd-Frank Act in the US have highlighted the need for financial institutions to effectively manage and maintain reference data.
R3 claims that the collaborative prototype developed by the working group demonstrated the potential application of distributed ledger technology as an agile solution, which could provide the capability for regulators and network participants to view in real time which parties on the ledger have created, issued and proposed amendments to the data record.
The firm says that implementation of distributed ledger technology deployed in this project facilitated ongoing, automated data distribution across all participants, as well as provided a model to manage conflicting data – demonstrating potential solutions to two of the leading causes of reference data inaccuracies.
The study of distributed ledger technology’s application to reference data is still in its early stages; this exploratory exercise was designed to encourage greater review and analysis of how distributed ledger technology could be used to enhance financial services operations.
David Rutter, CEO of R3, comments: “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. Distributed ledger technology – which allows financial institutions to push these functions to a cloud environment – removes the need to reconcile multiple copies of data, providing a sophisticated and agile solution to the headaches currently caused by these legacy systems and processes.”
Emmanuel Aidoo, who heads the distributed ledger and blockchain effort at Credit Suisse, adds: “Using Blockchain and Distributed Ledger Technology as a shared reference data backbone for the industry makes intuitive sense. 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.”
The Securities Industry and Financial Markets Association (Sifma) helped to coordinate testing of the prototype and says that it will continue to work with its members to review the potential application of blockchain technology in reference data.