Deloitte Luxembourg has developed a proof of concept to address regulatory transaction reporting in a Distributed Ledger Technology (DLT) environment.
Through smart contracts, transaction reporting becomes more transparent, reliable, fast and immutable.
“Distributed Ledger Technology offers a world of new opportunities when it comes to trade, post trade and related regulatory reporting. Thanks to smart contracts and DLT, the quality and transparency of reported transaction data will increase and the reporting costs will be substantially reduced,” explains Laurent Collet, Partner at Deloitte Luxembourg. “With a DLT solution, the transaction data will be readily available to the trade repositories and regulators in a unified form and there will no longer be any need for time-consuming reconciliation.”
The reporting challenge
Under the European Markets Infrastructure Regulation (EMIR), all counterparties involved in trade transactions must insure that the details of any derivative contract—OTC or exchange traded—are reported to a trade repository no later than the working day following the contract. The main challenges faced by financial institutions reporting their transactions are related to data quality, cost of reporting, timing issues and more importantly, data reconciliation.
New regulations like MiFIR and SFTR are going to be enforced in the next two years and will dramatically increase the scope and the volume of transactions to be reported by financial institutions to the competent authorities on a daily basis. This is the challenge Deloitte is addressing through its DLT solution, which supports current and future regulatory challenges when it comes to OTC transaction reporting.
ESMA on the lookout for tech
In June 2016, ESMA, the European Securities and Markets Authority, published a Discussion Paper entitled The Distributed Ledger Technology Applied to Securities Markets (ESMA/2016/773). The paper addresses the potential benefits and risks that the use of distributed ledger technology could bring when applied to securities markets. Deloitte Luxembourg’s proof of concept will help regulated entities and regulators assess the questions raised in the ESMA Discussion Paper regarding regulatory reporting activities in a DLT environment.
In its DLT proof of concept, Deloitte Luxembourg suggests a brand new and innovative process for transaction reporting. The counterparties of the transaction will seal and report their deal using a smart contract, whose terms include all the aspects needed for the transaction reporting. The regulators will be able to control and monitor the transaction data and their daily updates, which are stored in the distributed ledger.
By combining its solid regulatory reporting expertise with advanced technical developments, Deloitte’s role in the process would be to support counterparties as their agent in validating their data and in setting up and monitoring the smart contracts.
The Grid gets going
In May, the Deloitte network of member firms announced a multi-million investment in its financial services blockchain lab, named The Grid Blockchain Lab. Deloitte Luxembourg’s new proof of concept is one of the first projects developed as part of this initiative.
“With this proof of concept we explore a new paradigm in which distributed ledger technology does not disintermediate incumbents but rather proposes a far more efficient and lean processing of regulatory reporting using proofs of process and tokenized transaction reports. By combining this solution with developments undertaken by other Deloitte member firms, we are able to propose to our clients an ever growing DLT-based ecosystem of solutions for the financial services industry, demonstrating the combined strengths of our global networks of industry and technological specialists,” concludes Thibault Chollet, Director and Blockchain Leader at Deloitte Luxembourg.