UBS, Barclays, Credit Suisse and Thomson Reuters explore Ethereum-based MiFID II solution

Barclays, Credit Suisse, KBC, SIX, Thomson Reuters and UBS are looking at ways to automate MiFIDII regulatory requirements using a modified version of Ethereum smart contracts.

The collaboration, which tests the quality of counterparty reference data through anonymous reconciliation with industry counterparts, ran on a permissioned blockchain on the Microsoft Azure cloud platform. The project aims to improve the way in which participants can baseline their Legal Entity Identifier (LEI) reference data against the industry consensus.

The term "smart contract" in regard to Ethereum means some discrete piece of business logic, uploaded to the blockchain to then execute some function or other in a more automated manner, which aims to be instantly verifiable to all participants on the network.

The project was initiated by UBS in the innovation lab at Level39 in London and was borne out of the need to improve data quality as part of the impending implementation of the MiFID II/MiFIR regulation on January 3, 2018. This new legislative framework aims to strengthen investor protection and improve the functioning of financial markets making them more efficient, resilient and transparent, said a statement.

Within the regulation framework is the expectation for each institution to have an individual Legal Entity Identifier (LEI). The reconciliation of the reference data which pertains to the LEI for each entity - such as industry classification, identifiers and European Securities and Markets Authority (ESMA) data - is the project's focus, with the aim of streamlining the process for all participants.

Christophe Tummers, Head of Data at UBS, said: "Traditionally, a firm such as ours quality checks data against multiple sources but we do not have a quality baseline against peers. Through using blockchain-inspired smart contracts, the reconciliation of data can happen in almost real-time for all participants, anonymously."

The specific reference data for each Legal Entity is cryptographically concealed at each institution using a process called hashing. The source data is held and remains within the participating institution. Only the hashed data is submitted, anonymously, to an Ethereum private blockchain powered by Microsoft Azure.

The Ethereum smart contracts then reconcile the data against the consensus and provide each participant, via a user interface, the ability to search and view their own specific data in real-time. A user can then quickly see where the anomalies lie in the data set and work to resolve those, the statement said.

"Applying blockchain to the challenges of regulatory data management presents an additional exciting opportunity for SIX to focus its data quality efforts and expertise in regulatory services in a customer oriented way," said Robert Jeanbart, Division CEO SIX Financial Information.

Mark Davies, Global Head of RMS Data Services at Thomson Reuters, said: "MiFID II creates complex data management challenges for businesses, and this initiative presents a unique opportunity for firms to benchmark content alongside their peers before it is used in regulatory reporting.

"This is an exciting and collaborative project that uses the latest blockchain technology to solve a real-world business challenge by improving the quality of counterparty reference data."

The current phase of the project is a pilot in a mock-live environment using 22,000 non-sensitive LEI reference attributes for cash equity issuers. The pilot is to complete by the end of January 2018, with further, staged rollout dependent on the findings.

"This is an important project as it establishes blockchain benefits in a broader context than clearing and settlement. The use of blockchain to solve real-world regulatory requirements in a cost effective way is very appealing", said Emmanuel Aidoo, Head of Blockchain Strategy at Credit Suisse.

"We hope that in future, with the help of further automation, this project can move beyond simply anomaly detection to that of resolution." added Tummers.