UBS and collaborators have worked together to produce an ethereum-based compliance solution that would improve the lives of those involved in legal and financial compliance matters.
The system is dubbed the Massive Autonomous Distributed Reconciliation platform or MADREC. UBS has worked with many banking partners like Barclays, Credit Suisse, SIX, Thomson Reuters, and others to facilitate an easier reconciliation process when it comes to their vast holdings of counterparty direct data and metadata.
At the current moment, firms who heed to standard regulations use the process of legal entity identifiers.
According to the Global Legal Entity Identifier Foundation (GLEIF), the Legal Entity Identifier (LEI) is a 20-digit, alpha-numeric code based on the ISO 17442 standard developed by the International Organization for Standardization (ISO). It connects to key reference information that enables clear and unique identification of legal entities participating in financial transactions. Essentially, the publicly available LEI data pool can be regarded as a global directory, which greatly enhances transparency in the global marketplace.
The firms use the legal entity identifiers so they can perform a transaction for their clients in a transparent and legal manner. Regulations are changing and becoming more stringent, though, so banks are adapting to a new process to make their compliance aspects easier.
The banks are planning for the regulatory change that is brought about by the Markets in Financial Instruments Directive II, which will be implemented in the European Union on January 3rd, 2018. As a part of this law, all sorts of accepted legal institutions will be mandated to make use of the LEI codes.
MADREC would make it to the point where the banks don’t have to do the clearing process on an individual basis. They can do it together in an automated manner, with the continuous process taking place in an Azure environment.
As with most applications of the blockchain, this new implementation will help to save on infrastructure and personnel costs, which will save the banks money in the long run.
The automated system was conceived and was built over the course of half of a year, and grew into a system that is run on a smart contract network. The bank worked with the Legal Entity Identifier Regulatory Oversight Committee ( LEI ROC) and others to make sure that they would be making an improvement on processes and be ready for the new mandate that will be taking place next year.
The idea is that the smart contracts will take care of the work on demand, as opposed to the prior system that would have been much slower and would have only checked on longer stretches of time periods. The inclusion of smart contracts allows for quicker and transparent checks, making it to where results are more accurate and processed in a smoother manner.
Christophe Turners, the Head of Data at UBS, said in a press release:
“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 financial institution using a process called hashing. The source data is held and remains within the participating institution. The hashed data is the only information that will be 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 anomalies.