Banks and settlement houses are redoubling their efforts to digitize their inefficient paper-based practices as rising costs, regulation and the encroachment of new technologies put pressure on squeaky systems.
Deutsche Börse, the German stock exchange operator, will unveil a digitized central ledger on Wednesday that could cover 80% of the country’s securities from next year. The system, which is based on blockchain technology, could also be used for cryptocurrencies and stablecoins in the future, the exchange added.
Earlier in the week, the International Swaps and Derivatives Association (Isda) scanned the extensive book of legal documents used for most derivative transactions around the world, in part to prepare for the arrival of contracts written in computer code.
These moves to modernize the back office and legal systems come after the financial system was strained by volatility resulting from the coronavirus crisis in March of last year.
Many banks and asset managers did not know if their transactions were completed. The problem has been exacerbated by people working from home.
At the same time, banks continued to be interested in the promise of blockchain technology, in which networks of computers verify transactions and create a single, immutable record of transactions.
“Covid has undoubtedly played a role in demonstrating the need for fundamental change. Yet even in the face of this massive global awakening, many of the institutions that underpin the financial system have been slow to act. It’s unbearable, ”said Charley Cooper, managing director of R3, which assists Deutsche Börse.
The German group said its plan was in part motivated by new European regulations which required all newly issued securities in the bloc from 2023 to be in a paperless format. All securities traded must be held electronically by 2025.
Stephan Leithner, board member of Deutsche Börse, added that his new system went much further as it would create a “gold source” for all transactions, which could be used by issuers, regulators and custodians as the basis for trading and administration services. .
Issuers could offer structured products to investors on the same day instead of waiting several days, which created a price differential, Leithner said. A new system could automate the payment of coupons. “The underlying product has not been digitized. The source of gold today is the document in our safe.
The system will initially cover structured products such as warrants, certificates and commercial paper, which are popular products among German investors.
Microsoft, Digital Asset Holdings, and VMware help create the Distributed Ledger. BNP Paribas, DekaBank, Deutsche Bank, Citigroup, Goldman Sachs and Raiffeisen Bank International are among the banks supporting the project.
For Isda, the redesign was the first since 2006. Since then, its 130-page definition booklet has racked up 586 pages of amendments via nearly 90 supplements, which was “no longer sustainable,” he said. .
It will release revised digital versions in the future, eliminating the need for additional PDF or paper supplements, he added. Scott O’Malia, managing director of Isda, said the group is working to support the digitization of its legal products and documents.
The move would potentially open up the derivatives market to greater use of smart contracts, computer programs that can contain financial assets and be coded to automatically execute actions such as interest payments.
“Financial institutions are looking to increase the efficiency of their business processes in order to reduce complexity and costs,” he said.