A significant step has been taken towards blockchain technology helping asset managers to distribute funds more efficiently and improving client experience.

For the first time, fund shares have been purchased using digital ledger technology and smart contracts on the FundsDLT platform. Some of the biggest names in the industry are working to bring this Luxembourg-based project to market.

New technology will help asset managers attract new clients; distribution costs need to fall, and investor experience at the point of sale must improve. Achieving efficiencies requires a reshaping of the way orders are collected and processed. Cross-border fund distribution is a complex business, made tougher still by increasing regulatory demands, but streamlining the morass of point-to-point communication channels with blockchain could result in substantial improvements.

Maxime Aerts, Chief Operating Officer, Fundsquare

Maxime Aerts

Chief Operating Officer, Fundsquare

Creating critical mass on a blockchain platform would open the way for innovations such as sophisticated analytics that could extract value from the mass of data

Sophisticated ecosystem

The mutualisation of data sharing and order processing through a central counterparty already helps to simplify matters, and blockchain technology can take this to the next level. It would help create a decentralised but unified ecosystem of activities related to transfer agency, custody, distribution, settlement, and clearing. This would feature connectivity and transactions executed automatically using smart contracts, including links to know-your-customer (KYC) hubs for quick client identification and onboarding.

The system will enable stakeholders to develop applications and products that would improve the customer experience by digitalising interactions. For example, through a user-friendly interface, an investor would apply to purchase fund shares, provide KYC-related information and then supply cash through a digitalised token. Transfer agents would then validate the KYC requirements and order acceptance, while an asset manager could see inflows and outflows in the registrar in real time. Once the net asset value has been published, the settlement process would be executed instantaneously.

Proof of concept

These are still early days, but the full potential was demonstrated over the FundsDLT platform on 5 July. Fund shares and cash changed hands for the first time on this blockchain-powered private distribution system as Natixis Asset Management successfully sold a range of fund shares with subscription orders made using a mobile app and transmitted automatically to FundsDLT. This information was then accessed by Natixis AM and other interested parties, including the transfer agent CACEIS, which then was able to approve or decline the applications.

Following approval, the clearing and settlement process was triggered. All this interaction took place on FundsDLT, and the cash and payment process was then handled using a related specialised online payments solution.

DLT stands for distributed ledger technology, a peer-to-peer network on which time-stamped records can be made visible to all users. It is the technology that powers blockchain and thus crypto-currencies. These ledgers can be public and viewable by anyone (as is the case with bitcoin and the rest), or they can be limited to a specified number of users.

FundsDLT is being developed by Fundsquare, the Luxembourg-based investment fund order routing and information services specialist; InTech, an IT solutions firm; and consultants KPMG Luxembourg. Testing is also being aided by some of the biggest names in the industry.

Following the successful completion of the first transactions, the team is now looking to make the system more robust, as well as investigating other uses and applications.

New possibilities

What other types of efficiency gains may be possible with this Blockchain ecosystem? Smart contracts enable operations to be enacted automatically without human intervention, when certain conditions are met. FundsDLT features three smart contracts, including an order management system (OMS) smart contract that could govern order routing and the creation of investor accounts.

This would route the order from the investor to the transfer agent and execute the delivery-versus-payment of shares against cash on the transfer agent and investor accounts.

Then there are cash central counterparty-clearing smart contracts, with FundsDLT directing cash movements that mirror the clearer account on blockchain. Transfer agency smart contracts could create shares on the transfer agency account on the blockchain, for use by the OMS smart contracts.

Creating critical mass on a blockchain platform would also open the way for innovations such as sophisticated analytics that could extract value from the mass of data. This new approach will also incentivise players to add value, particularly for transfer agency functions. Similar opportunities will open up regarding order processing, cash management, transfers, payments, KYC and due diligence, correction of related errors, and more. The potential for new value adding services from greater mutualisation is vast.

Since FundsDLT was launched in December 2016, the concept behind it has been proven, and development and testing will continue, with the planned implementation of an industrialised product due in 2018. This could be the efficiency and flexibility breakthrough the fund industry has been waiting for.

Asset Servicing Times, issue 173

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