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Recently ICAP, the world's largest interdealer broker, released details of a proof of technology using blockchain. The announcement also heralded a partnership between ICAP and newly-launched enterprise blockchain provider Axoni.
This deal is obviously important given ICAP's long reach into financial markets; and also because it demonstrates a unilateral appropriation of some elements of blockchain technology considered most palatable to ICAP's partners and other intermediaries working in a specific area of finance.
Jenny Knott, CEO of ICAP's post-trade risk and information (PTRI) division told IBTimes: "Indeed this is not a classic implementation of blockchain where every node contains all the information. We believe that for some use cases the industry is not ready yet to adopt the pure model. Instead, we believe in a more practical approach where each organisation will hold only the information they are entitled to receive."
ICAP tested transactions involving a variety of asset classes and instruments contained by a smart contract engine, allowing buyers and sellers to transfer securities, approve transactions and alter ownership records. The added automation means valuations or trade compression could be handled in a much more efficient way than is currently done, while meeting the appropriate scale requirements.
A whole host of services need to happen to a transaction through its life cycle, and every one of those services has to be brought inside the bank, said Knott, making it very time consuming from a procurement and compliance perspective.
She said: "With an FX trade, for example, we did an allocation which is a specific business process that needs to happen for prime brokers; we did a roll-over, which is another thing that you often do with FX trades. So we proved that we can do stuff to the smart contract. Another component would be reporting: we could enrich it with the reporting requirements and send it off to the DTCC."
The test involved nine representative participant nodes on the blockchain network. Knott explained the system also used a service node which handled a golden record of all the data. "Then we commission each bank to have the extract of their data and we send that through the blockchain to their own node. So we are not sending all the data everywhere like a perfect blockchain. We are only sending the data that is relevant to bank A to bank A; we are only sending the data that is relevant to bank B to bank B."
She said this hub and spoke model would distribute bank A's data to their server, where it could then be extracted and used only by ops, or used by risk, finance and the traders themselves. "Now they can start transforming their own business processes and they can do it at their own pace.
"We are not trying to disrupt. We are doing this with the industry, not to them. They are not outsourcing, they are partnering and it is their data sitting on their server. This will allow them to transform all of their internal processes and many in the middle and back office that they currently do today single-sided.
"We are trying to partner with the clients to create a very efficient way of having their golden data, which is something banks do not trust. They do not trust their own data. They are constantly re-reconciling and re-validating their data, constantly trying new pieces of technology.
"Our credibility comes from the fact that we already provide that trusted data to them, for a point in time, at the start of the contract. We already own the fact that this contract is golden today, just using different technology."
ICAP's Harmony platform matches trades and sends messages to each counterparty notifying that they have a good trade. That internally triggers all of their own processes, which flows down into their books of records, and then any other subsequent operational risk or control processes. The smart contract model opens that process up to everybody who can see you are holding the golden source of data from that ledger, said Knott.
"You can actually apply valuation to the single data stream and both parties will receive a persistent push of the updated valuation and match it exactly. So you overcome issues where one firm will match and run to six decimal places and the other will do a valuation and run to 12 decimal places - and ultimately create some sort of break or out trade in respect of the contract."
Looking back into the heart of Enron and Sarbanes Oxley, she said one of the problems was that trades weren't consistently and continuously matched through the life cycle of transactions. "Not just as a core trade but as how the trade is enriched from a valuation perspective - that was the big issue with Enron; it was the big issue and hence central counterparty clearing houses (CCPs) came about and all that."
Knott said ICAP's version of blockchain in the OTC cleared space should give the CCPs comfort. "What you have today is your OTC executed trades: both parties will novate those trades at the end of the day, at which point the CCP needs to make sure the parties are matched, they have got the right identifiers on. Then the CCP assumes the risk in the respect of those trades facing off against the two parties in the normal concept.
"But if you are providing a data string that is matched by this technology, it can be pushed to both parties and the CCP at the same time, at which point everybody is looking at the exact same record. So it makes it easier for the CCP's to accept the novation and to ensure that when they are taking on that novation there is no out-trade between the parties and the data is correct from a risk perspective."
"The purpose is here to be a golden source of data for the ecosystem. It's not to disintermediate competition or partners," she said.
Axoni is one of the financial technology startups funded by Euclid Opportunities, an early stage funding program of ICAP, reported Bitcoin Magazine.
Greg Schvey, CEO, Axoni told IBTimes in an emailed statement: "Partnering with a forward-thinking industry leader like ICAP is a great way to bring advanced blockchain technology to the world. Their experience and reach, combined with Axoni's innovative solutions, can help automate and synchronise highly complex markets."