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ESMA Talks About Blockchain

Drum roll ladies and gentlemen, it finally happened! We finally saw a long awaited milestone in the European Blockchain regulatory scene and it just might become another kick start factor for the further development in the field. The European Securities and Markets Authority (ESMA) released a report called Distributed Ledger Technology Applied to Securities Markets build on the discussion paper released last year in June. The main European Union securities authority notes that Distributed Ledger Technology (DLT) also known as Blockchain technology could bring huge cost efficiency savings “notably, more efficient post-trade services, enhanced reporting and data management capabilities.”

More specifically, ESMA who provides supervision over Europe’s financial market and infrastructure foresees DLT as having a profound effect on CCPs and CSDs, but regulatory grey areas still remain grey. On one hand, there needs to be less on some regulatory regimes, but on the other, there needs to be new legislation to mitigate potential emerging risks when applying Blockchain technology to financial markets. The authority states that beyond financial regulation, other areas of law such as competition, contract and company law may hinder the immediate scalability of DLT.

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Blockchain in Insurance and Reinsurance

The reinsurance market is ripe for disintermediation and it is no surprise that it is one of the many sectors exploring how Blockchain technology can help enable efficiencies in what can often be a fragmented operating model. The insurance market is widely seen to be lagging behind banking in terms of technological innovation and adoption.

The insurance market as a whole is reliant on data supplied from multiple sources including the end client, broker, reinsurer and various service providers such as administrators and custodians. Analysis by PricewaterhouseCoopers (PwC) calculated Blockchain adoption in the reinsurance market, for example, would result in cost savings of up to $5 billion.

The PwC data highlighted that between 5% and 10% of premiums are derived from reinsurance expense ratios. The PwC study added Blockchain solutions could remove between 15% and 25% of expenses in the reinsurance industry. Integration of Blockchain could reduce the operational workload around data processing, by streamlining processing times and costs of placement.

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FCA Investment Management Review

The active asset management community was dealt a shock by the UK’s Financial Conduct Authority (FCA) on 18 November. The FCA’s Asset Manager Market Study castigated the active management industry for collecting high fees and delivering unsatisfactory performance. The FCA found active managers charged on average a management fee of 0.9% whereas a passive provider typically incurred costs of 0.15%, although the latter had generated superior returns.

The FCA’s paper made a series of recommendations around active managers’ cost structuring, including the possibility of “an all-in-fee model”. This approach would force firms to cover all of their costs in a single fee including transaction charges. The FCA’s objective is that it wants investors to understand what they are paying for. As such, this is likely to result in active managers being forced to reduce their fees.

This poses a problem for managers as their compliance costs have been steadily growing. A 2015 survey by Alpha FMC of asset managers running a total of £6 trillion in Assets under Management (AuM) found 78% of respondents expected to spend more on regulatory compliance over 2016, while 89% said they would devote greater time to dealing with regulatory matters. A paper by Citi in 2015 said small hedge funds, for example, were struggling to pay for their operating costs through their management fees alone, estimating a manager required at least $310 million in AuM to breakeven. Active managers, particularly boutiques, are facing huge cost challenges.

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How Can Blockchain Help Streamline Syndicated Loans?

Market participants often complain about the longevity of equity trade settlement, particularly in emerging markets where trade life-cycles can be as long as T+5 or more.

The internationally accepted T+2 settlement time-frame for equities is becoming more commonplace, particularly with the US transitioning from T+3 to T+2 for equities, corporate and muni bonds and unit investment trusts in September 2017.

Spare a thought then for market participants transacting in syndicated loans, and its associated trade settlement process…….

A typical syndicated loan will settle on T+19 or T+20. Syndicated loans are a critical source of funding to the real economy, with beneficiaries including major governments, large corporates or small-to-mid-sized enterprises (SMEs). There is also a sizeable secondary market with various financial institutions trading these loans.

Enabling syndicated loans to settle immediately in a Blockchain framework would bring about huge benefits. Blockchain – by facilitating real-time settlement and providing an immutable database of transactions – would bring an unparalleled level of automation and transparency to the asset class in both its primary and secondary markets.

Transparency is crucial, particularly because the syndicated loan debt is often shared between multiple underwriters. The volume of documentation – given the number of participants involved in the syndicated loan trade cycle – is significant, even by the standards of today’s post-trade environment.

So how could Blockchain boost transparency in this market? Blockchain could enable – through permissioned access – for market participants to pull syndicated loan transaction data from the ledger in real-time.

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What Makes BlockEx DAxP Stand Out

A growing number of financial institutions including high-frequency-traders (HFTs), hedge funds, asset managers, retail traders and brokers, are increasingly taking note of digital assets – such as as crypto-currencies, tokenised assets or smart contracts – and the disruptive market infrastructures that support them.

Among them is BlockEx, a digital asset issuance and trading platform that is protocol agnostic and capable of plugging into any blockchain operating model. Furthermore, it can bridge the gap between traditional and digital assets and trading venues and help boost automation. This can be attained through its ability to tokenise existing financial assets for trading on BlockEx, as well as two-way reconciliation.
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