World's first blockchain structured product
20 March 2018
The first Structured Product to be transacted and custodied using blockchain launched on Friday 16 March, from Allen & Overy’s tech innovation space Fuse. The product, a GBP principal protected note linked to the FTSE 100 index, is registered, cleared and settled on the Ethereum blockchain.
Created by Marex Solutions, in partnership with Chartered Opus, the product uses the ResonanceX multi-issuer platform developed and connected to the blockchain by Nivaura to automate price discovery, issuance and administration. Allen & Overy provided advice regarding the legal documentation and, as a first in this space, the product has been executed within the FCA’s regulatory sandbox.
Distributed ledger technology has the potential to disrupt the trillion-dollar structured investment product markets, which are increasingly being sold in higher volumes, but for smaller notional amounts. This makes the pre, post-trade and custody costs highly significant. As things stand, a few large players dominate the various elements of the value-chain, from manufacturing and distribution, to custody, clearing and registration. Blockchain opens-up this market to best-of-breed niche firms who can come together to create competitive products, a development that disrupts the traditional finance models that relied partly on centralised trust to earn revenue.
For investors, the advantages of blockchain in structured products includes:
• Reduced costs, with blockchain potentially removing intermediaries.
• Fewer opportunities for data manipulation, with blockchain acting as the database.
• Less chance of human error associated with handling such transactions.
• Faster settlement. The current settlement cycle is two-days. By using blockchain, this can be reduced to minutes, if not seconds.
• Minimised settlement risk, given the faster settlement time.
• Greater transparency, with holdings already backed by securities.
The next development is to fully tokenise issuance and administer lifecycle events and payments via smart contracts.
Allen & Overy partner Philip Smith commented: “This transaction builds on the work we’ve already done with Nivaura to carry out the world’s first fully automated cryptocurrency-denominated bond issuance that was also cleared, settled and registered on a public blockchain infrastructure. The launch underlines the idea that developments in distributed ledger technology are going to have a significant impact on the capital markets.”
Richard Cohen, senior associate, added: “This issue demonstrated how distributed ledger technology can facilitate clearing and settlement, without requiring a traditional settlement system infrastructure and the cost and complexity that can bring.”
Multi-issuer platform responsible for arranging and distributing.
Guillaume Chatain, CEO, commented: “With this first ever blockchain issuance conducted in parallel with a traditional issuance via Clearstream, we’re not only demonstrating that our fully automated multi-dealer platform is well integrated within existing capital market systems, but that we are committed to use technology and the benefits of decentralisation to further reduce production costs. This will ultimately translate into lower minimums and better economics in the structured products ResonanceX will distribute.”
Technology platform for distribution and arranging including digital custody engine.
Dr Avtar Sehra, CEO, commented: “Multiple hand-offs between key activities, systems and parties results in overall inefficiency and ineffectiveness in the process, which adds to upfront and ongoing execution and compliance costs and challenges. Nivaura enables capture of data at every interaction point of the issuance and administration process, thus managing complexity and driving end-to-end automation in a flexible and compliant manner.”
Product manufacturer and underlying credit risk.
Nilesh Jethwa, CEO, Marex Solutions, commented: “Technology is disrupting traditional finance by allowing niche specialists to take the place of larger organisations. By being able to provide these products more cheaply, quickly and securely will, we believe, raise the bar for the industry.”
Production platform for tailor-made investment products.
Markus Fehn, Head of Strategy & Product Innovation, commented: “Since 2013, our mission has been to issue structured products in a transparent and flexible manner, giving investors access to a new universe of investment solutions that traditional issues can’t offer. We are convinced that our decentralised production approach, together with the implementation of new technology, will help our customers gain a competitive advantage in the market.”
Financial Conduct Authority
The Financial Conduct Authority’s regulatory sandbox allows businesses to test innovative products, services, business models and delivery mechanisms in the real market, with real consumers. The sandbox is open to authorised firms, unauthorised firms that require authorisation and technology businesses. https://www.fca.org.uk/firms/fca-innovate.
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