Mutual Funds Look to DLT

Shanny Basar

The blockchain developed by Calastone, the global funds transaction network, is the latest example of the technology moving beyond proof of concept into real-use cases.

Calastone wants to reduce costs in the mutual fund industry by placing the entire market – from fund manufacturer to end investor – on a blockchain. Last month the firm announced the successful completion of the first phase of its proof of concept distributed market infrastructure for trading and settling mutual funds.

Ken Tregidgo, Calastone

Ken Tregidgo, deputy chief executive of Calastone, told Markets Media: “Our internal proof of concept was successful where we tested the equivalent of our daily global transactions and proved that settlements and payments were possible.”

The Calastone Transaction Network enables fully automated managed fund trading between participant fund managers and distributors, regardless of technology and geography and includes more than 1,200 fund distribution and asset manager clients across 34 markets.

Julien Hammerson, chief of Calastone said in a statement: “Our vision is to enable friction-free trading for funds industry participants. The scale and connectivity we have built in major markets around the globe makes us the natural partner to explore operational and infrastructural efficiencies across the global funds industry.”

In the second phase, Calastone is in discussions with clients so they can experiment with the distributed ledger, develop their own applications and formulate a migration path at the pace which suits their own business model.

Tregidgo said: “DLT is not yet a mature technology but will mature over the next two to three years, different use cases will emerge and we are engaging with clients now.”

The Financial Conduct Authority, the UK regulator, said in a discussion paper on DLT in April that the technology combines existing tools such as shared databases, cryptography and peer-to-peer networking to offer firms the ability to share data efficiently and securely.

“Technology companies seeking to provide DLT-based solutions have grown sharply in number and size, and regulated firms have invested increasing resources in using this technology to provide financial services,” added the FCA. “Industry efforts to investigate DLT have become especially concentrated in the last 24 months, and in the second half of 2017 into 2018 we expect to see more movement from ‘proof of concept’ to ’real-world’ deployments.”

The regulator continued that these benefits are likely to emerge in sectors where multiple participants need to share data and/or processes safely and the short-term benefits focus on improved efficiencies in firms’ back offices. Additionally, the FCA said DLT might enable challenger firms to offer more robust financial services at a better price than incumbent institutions and foster disruptive innovation in the interests of consumers in certain markets.

Tregidgo said: “DLT can facilitate digital distribution, data supporting regulatory purposes and reduce costs. Our distributed market infrastructure can enable future business models.”

In another example of the maturity of blockchain, SIX Swiss Exchange and Nasdaq, together with technology partner Chain, said this month they will provide distributed ledger technology for the Swiss venue’s over-the-counter structured products. The new blockchain will integrate with, rather than replace, several systems currently used by SIX.

Magnus Haglind, head of product management in the market technology division of Nasdaq, told Markets Media: “SIX will run a full scale test in the fourth quarter with real clients and real flows in parallel with the current system. DLT is mature enough that we can discuss applications and workflows rather than the underlying technology.”

Additionally Cobalt, the network that aims to reduce post-trade costs in foreign exchange by up to 80%, is due to go live later this year. Trades can be executed on any platform and Cobalt creates a unique verified transaction on shared post-trade infrastructure. Cobalt has developed a range of processes middle and back office that can plug into any distributed ledger technology.

Adrian Patten, co-founder of Cobalt, told Markets Media: “We create a unique verified transaction, hash it and can store it on any ledger. We looked to solve a business problem using the right technology rather than developing a shared ledger and then working out how to use it.”

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