Block8's Chief Technology Officer25.01.2020. in Technology, Thought Leadership, Solutions, Product
Securitisation is the process of collecting a pool of receivables (often debt, such as mortgages, auto loans or unsecured loans such as credit cards) into a set of tradable securities that are sold to investors. Securitisation is typically used to establish a facility to fund the creation (sale) of the initial assets (loans).
A typical securitisation process involves passing a set of initial assets through a series of intermediaries to an eventual buyer (investor). This can include originators, sponsors, securities managers, trustees or issuers, and rating agencies, all before it hits the final investor. For the investor, trusting these intermediaries is not commercial, or in some cases, not compliant with regulation given the prudential requirements associated with financial services activities associated with ensuring the integrity of underlying data - including developing a high degree of confidence of appropriate custody of assets (i.e. “who owns what”).
This fundamental technical inability to directly view the underlying information was the basis of a problem that resulted in the GFC of 2007 and 2008; assets were contained in black boxes, and poor buying decisions were made on the basis of bad information. Since then, significant regulation has been introduced to ensure an appropriate level of confidence is attained with a given company’s data integrity.
However, the processes that are required to establish this level of confidence in asset trading are retrospective-looking, imperfect and expensive.
As a result, investors must pay for - through insurance and expensive operational controls - their technical inability to view the source of truth for their underlying assets as well as the operations of intermediaries in their value chain.
This need to rely on these asset trading processes constitutes a service that up until today, has had no purely technological alternative.
Read more about one of the key deficiencies in legacy systems here. Below we illustrate how the ownership information over assets is referenced throughout a financial value chain using a legacy architecture:
A distributed ledger based system would bring unprecedented transparency to the securitisation process to enable actors down the value chain to make better decisions, lower risk and lower the cost of compliance; the need to verify data that is given to you by a counterparty completely evaporates: your company has the same database as your counterparty or intermediary. You can see what they see. There is a shared truth that relieves the requirement for business processes associated with confirmation, verification, reconciliation and audit.
The real-world impact of this is that operational costs can be slashed by requiring far fewer resources to manage data and operate business processes. The removal of these processes means that the end-to-end time needed to transact is reduced significantly.
The ability to use new software products to manage asset securitisation processes means that securitisation, and hence funding, of new yield-bearing assets will be made easier, faster and cheaper. Permanently.
DLT will unlock new horizons of automation in financial services and in securitisation in particular.
Consider the following (legacy) securitisation value chain:
This is what it looks like as a distributed ledger-based securitisation value chain:
Block8 works with a range of organisations to develop innovative solutions using distributed ledger technology. We are particularly experienced with the time and budget constraints of early stage tech products, and we bring this lean pragmatism to deliver enterprise outcomes.
Take a look at how our expertise helped Australian Mortgage:
About the Author:
Samuel Brooks is an expert in connecting next-gen technology with current-gen business problems, with particular specialisation in the development of distributed ledger systems, having designed many DLT-based solutions and authored and contributed to multiple public submissions from both industry and government.
He is also an active member of the Australian blockchain community, including regularly speaking at technology conferences, meetups and podcasts, and contributing to industry and International Standards committees.
Samuel holds a degree in Electrical Engineering from UNSW and has been working hands-on with blockchains since 2014.