While cryptocurrencies have been in the spotlight thanks to a late-2017 explosion in asset prices, there is much more to the story. Over the past decade, the underlying technology behind cryptocurrencies—known as blockchain–has emerged as a disruptive force, capable of making systems in nearly every industry more transparent and secure.While the technology has its roots in cryptocurrencies like Bitcoin, its applications have begun to spread far and wide—including to more traditional areas of banking & finance.
What are blockchains?
The technology behind blockchains can be difficult for even those well versed in technology to fully comprehend.Essentially,a blockchain is an evolving record of transactions that stores information in unalterable chunks, is built to disseminate copies of those chunks across a network, and linksthem together with encrypted tags. The result is a decentralized (or "distributed") ledger that can be modified only when there is consensus among the members of that network.
How are OEMSs disruptive like blockchains?
Over roughly the same time period that blockchain technology has captured the attention and the imagination of the financial world, two more established classes of institutional trading technologies have progressed headlong towards a single framework. These platforms are order management systems, first developed in the 1980s to contend with the emergence of electronic trading, and execution management systems, which emerged in the late 1990s and early 2000s to help asset managers keep up with the massive acceleration and increasing complexity of electronic markets.
Over the last several years, the industry's attention has turned toward true OEMSs—order and execution management systems—as an inevitable future state. Converging workflows, regulatory scrutiny, and the need to consistently deliver performance while managing cost have made the OEMS an appealing proposition, and one that many buy-side firms have had to assemble from combinations of licensed point solutions and in-house development.
As many in financial services have wondered how to apply blockchain to new and existing processes and technologies, what might marriage of these two prominent trends in institutional technology look like?
What does the marriage of an OEMS and Blockchain look like, and what are the benefits?
FactSet recently announced just such a strategic relationship, in which we are integrating FactSet OEMS with a compliance solution from CG Blockchain. As their name implies, CG Blockchain has developed a distributed ledger that stores sensitive transactional data and alerts on a private blockchain, which is tied to another public (permissioned) blockchain. This dual-chain structure adds layers of protection for both asset manager and asset owner, while facilitating transparent, permission-based access to relevant records.
Asset owners can access the public blockchain and view an audit trail, which is fed, nearly in real time, as trades are managed and executed through FactSet OEMS. This level of transparency and speed marks a stark contrast to monthly, or even less frequent, reporting of holdings and transactions to end asset owners. The benefits this kind of permanent, unalterable record promises to participating asset managers are those of transparency, accountability, and ultimately investor confidence that these managers will act in their clients' best interests, at all times.
The bottom line, and the future
The bottom line is that this is a game changer for asset owners. Current standards for client reporting allow for long intervals—months, quarters, even years in the case of certified audits performed by outside accountants—in which bad things can happen. CG Blockchain provides asset owners with real-time, on-demand transparency as to how their assets are being managed. When considering the significantly increased compliance and audit regime in Europe under MiFID II,and the ripple effects it is having on compliance efforts around the globe, this may be a more efficient, more transparent, and faster way to comply with regulations—and a competitive differentiator.
John Adam is Senior Vice President, Global Head of Portfolio Management and Trading Solutions, FactSet.