What’s a custodian bank do in a blockchain world?

DigFin |Oct 21, 2020

Blockchain and custodian solutions - What’s a custodian bank do in a blockchain world?BNP Paribas Securities Services is reinventing a bank’s value where processing is no longer needed.

One of the benefits of blockchain-based projects at Australia Stock Exchange and Hong Kong Stock Exchange is they will eliminate the bulk of post-trade processing.

No more reconciliations between investors, corporates, brokers and custodians – because all relevant data is tracked on a shared ledger. Ditto for the paperwork among fund managers, distributors, registrars and transfer agencies, once tracking fund subscriptions and redemptions and cutting NAVs is fully automated in one network.

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BNP Paribas Securities Services is embracing blockchain, A.I. and other digital technologies to reinvent the custodian of the future. It has recently announced plans to introduce “smart elections” for shareholders in 2021, a project done with blockchain vendor Digital Asset.

Gary O’Brien, Hong Kong-based head of custody and clearing products for Asia Pacific, said,

“The core role for us is in asset services, reporting and settling transactions. But we are also taking client requests and transaction details to the market in the format they need, and vice versa.

He says this is in line with what ASX is doing with replacing Chess, its post-trade infrastructure, with DLT solutions. “It’s about how we as a custodian will receive data on their platform, new types of data they will bring, and how it will benefit us, our clients, and our clients’ clients.”

Change at the industry level

O’Brien says this will have real-world implications. Say a hedge fund faces a Friday market close at 5pm. Today, they must instruct their service providers what to do by 5pm Wednesday or maybe 9am Thursday, because it takes time to ensure everyone’s records match and securities and cash settle by the close.

This creates a two-day gap between instructions and market close, exposing the investor to market moves.

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“The right decision at 5pm on Wednesday on whether to reinvest dividends may not be the right decision at 3pm on Friday,” O’Brien said.

It’s not just that maybe a stock goes up or down in that window. It’s that investors need to choose between taking cash or taking securities, which they would use to finance other trades and hedges.

With smart contracts, investors gain two benefits. First, they won’t have to make the final decision until much closer to a market’s close, so they can utilize their capital more freely. Second, the smart contract can make the decision for them based on algos measuring events, prices and market conditions – including circumstances that are unclear and so should be routed to a human for a decision.

“This [Smart contracts] reduces the manual demands on portfolio managers, reduces their risk, and gives them information that’s more current to actual market deadlines,” O’Brien said.

Renard says the electronic voting for corporate actions is just one part of a broader transformation at the bank. Its efforts include enhancing client experience through new data sets and means of extracting insights, as well as industrializing the bank’s internal processes.

“Reconciliation is now standardized,” he said. “We’re looking at new use cases.”

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