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Blockchain in capital markets and structured finance

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The blockchain concept has generated a considerable amount of attention within capital markets, with discussions expanding into practical applications in securitization. Explore considerations around the application of blockchain in capital markets and the proposed applications of blockchain in structured finance.

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Blockchain in capital markets and structured finance

  1. 1. EY Global Blockchain Summit San Francisco, CA April 26, 2017
  2. 2. Page 1 EY Global Blockchain Summit Blockchain in capital markets and structured finance
  3. 3. Page 2 EY Global Blockchain Summit 178.42 490.48 497.33 46.93 0 100 200 300 400 500 600 2014 2015 2016 2017 (YTD) Investment($m) $1b investment 884.73 185.07 95.99 20.78 14.5 6.5 4.29 1.3 0 200 400 600 800 1000 U.S. and Canada Europe Asia Latin America Middle East Other Africa South America Investment ($millions) North America focus Financial Services, 42% Targeting financial services "RegTech" (Regulation Technology) Exchange Financial Services Infrastructure Mining Payment processor Universal Venture Capital Wallet Other Source: Coindesk.com, "Blockchain Venture Capital," http://www.coindesk.com/bitcoin-venture-capital Blockchain: investments
  4. 4. Page 3 EY Global Blockchain Summit Research and development 28 of the top 30 banks engaging in blockchain proofs of concept 28 banks Blockchain: approach in capital markets
  5. 5. Page 4 EY Global Blockchain Summit Research and development 28 of the top 30 banks are engaging in blockchain proofs-of-concept 28 banks Consortia and industry groups Global consortia working on implementing blockchains25 Blockchain: approach in capital markets
  6. 6. Page 5 EY Global Blockchain Summit Research and development 28 of the top 30 banks engaging in blockchain proofs of concept 28 banks Consortia and industry groups Global consortia working on implementing blockchains and distributed ledgers 25 Adoption Number of banks that expect to have blockchain in commercial production in four years 66% Blockchain: approach in capital markets
  7. 7. Page 6 EY Global Blockchain Summit Capital markets applications Know your customer and anti-money laundering Tokenization Securitization Asset documentation Derivative transactionsAsset servicing Managing customer identities throughout the organization Digitizing and tokenizing traditionally physical assets Securitizing tokenized assets for streamlined reconciliation Documenting the ownership and rights of assets Removing the need for reconciliation through distributed identities Determining ownership of complex derivative instruments Structured finance applications Syndicated loans CMOs CDOs Collateralized bond obligations Tranche documentationCredit default swaps Simplified syndication process so all parties have full visibility into loan structure and cash flows Readily available mortgage borrower credit details, even when in pooled vehicle Same benefits as commercial mortgage organizations, but include other debt obligations, such as car loans and bonds Full clarity and traceability of each underlying bond within a tranche Increased transparency of contract terms and details All tranches of securities “sliced” by smart contracts and slices automatically are documented by profile, e.g., risk, class, rating Blockchain: applications
  8. 8. Page 7 EY Global Blockchain Summit Blockchain: attributes Asset creation and transfer 1
  9. 9. Page 8 EY Global Blockchain Summit Data reconciliation Asset creation and transfer 1 Blockchain: attributes 2
  10. 10. Page 9 EY Global Blockchain Summit Unique identification Data reconciliation Asset creation and transfer 1 Blockchain: attributes 2 3
  11. 11. Page 10 EY Global Blockchain Summit Risk management tool Unique identification Data reconciliation Asset creation and transfer 1 Blockchain: attributes 32
  12. 12. Page 11 EY Global Blockchain Summit Revenue streams Risk management tool Unique identification Data reconciliation Asset creation and transfer 1 Blockchain: attributes 2 3
  13. 13. Page 12 EY Global Blockchain Summit Current pain pointsRevenue streams Risk management tool Unique identification Data reconciliation Asset creation and transfer 1 Blockchain: attributes 2 3
  14. 14. Page 13 EY Global Blockchain Summit Blockchain-enabled securitization life cycle tracking
  15. 15. Page 14 EY Global Blockchain Summit I. Loans Tokenize data sets Loan securitization: asset creation A B D C E F
  16. 16. Page 15 EY Global Blockchain Summit II. Financial structuring C1 C2 C3 F1 F2 F3 I. Loans A B D C E F Loan securitization: asset creation Track and create new data sets A B D C E F
  17. 17. Page 16 EY Global Blockchain Summit II. Financial structuring C1 C2 C3 F1 F2 F3 I. Loans A B D C E F Loan securitization: asset creation Track and create new data sets Accounts receivable X Accounts receivable Y Accounts receivable Z A B D C E F
  18. 18. Page 17 EY Global Blockchain Summit II. Financial structuring C1 C2 C3 F1 F2 F3 I. Loans A B D C E F Loan securitization: asset creation Track and create new data sets Accounts receivable X Accounts receivable Y Accounts receivable Z A/R X M L A B D C E F
  19. 19. Page 18 EY Global Blockchain Summit II. Financial structuring C1 C2 C3 F1 F2 F3 I. Loans Loan securitization: asset creation Track and create new data sets Accounts receivable X Accounts receivable Y Accounts receivable Z A/R X M L Security A Security B A B D C E F A B D C E F
  20. 20. Page 19 EY Global Blockchain Summit II. Financial structuring C1 C2 C3 F1 F2 F3 I. Loans A B D C E F Loan securitization: asset creation Accounts receivable X Accounts receivable Y Accounts receivable Z A/R X M L Security A Security B Full visibility of underlying data sets Investors Security B C3 F3 L A/R X M III. Unbundled view A B D C E F
  21. 21. Page 20 EY Global Blockchain Summit II. Financial structuring C1 C2 C3 F1 F2 F3 A/R X A/R Y A/R Z M LX Security A Security B AAA AA A BBB Regulators Due diligence Issuing bank Loan and borrower data 1 Due diligence 1 Loan securitization: pain points I. Loans A B D C E F A B D C E F
  22. 22. Page 21 EY Global Blockchain Summit II. Financial structuring C1 C2 C3 F1 F2 F3 A/R X A/R Y A/R Z M LX Security A Security B AAA AA A BBB Regulators Due diligence Issuing bank Loan and borrower data 1 Due diligence 1 Loan securitization: pain points I. Loans A B D C E F 2 Investors 2 Reporting2 A B D C E F
  23. 23. Page 22 EY Global Blockchain Summit II. Financial structuring C1 C2 C3 F1 F2 F3 A/R X A/R Y A/R Z M LX Security A Security B AAA AA A BBB Regulators Due diligence Issuing bank Loan and borrower data 1 Due diligence 1 Loan securitization: pain points I. Loans A B D C E F 2 Investors 2 Reporting2 Investors 3 3 Liability exposure 3 Security B C3 F3 LX M III. Unbundled view A B D C E F
  24. 24. Page 23 EY Global Blockchain Summit II. Financial structuring C1 C2 C3 F1 F2 F3 A/R X A/R Y A/R Z M LX Security A Security B AAA AA A BBB Regulators Due diligence Issuing bank Loan and borrower data Loan securitization: investor value approach I. Loans A B D C E F Investors Security B C3 F3 LX M III. Unbundled view Investors ► Risk models A B D C E F
  25. 25. Page 24 EY Global Blockchain Summit II. Financial structuring C1 C2 C3 F1 F2 F3 A/R X A/R Y A/R Z M LX Security A Security B AAA AA A BBB Regulators Due diligence Issuing bank Loan and borrower data Loan securitization: investor value approach I. Loans A B D C E F Investors Security B C3 F3 LX M III. Unbundled view Investors ► Risk models ► ReconciliationsA B D C E F
  26. 26. Page 25 EY Global Blockchain Summit II. Financial structuring C1 C2 C3 F1 F2 F3 A/R X A/R Y A/R Z M LX Security A Security B AAA AA A BBB Regulators Due diligence Issuing bank Loan and borrower data Loan securitization: investor value approach I. Loans A B D C E F Investors Security B C3 F3 LX M III. Unbundled view Investors ► Risk models ► Reconciliations ► Improved reporting A B D C E F
  27. 27. Page 26 EY Global Blockchain Summit II. Financial structuring C1 C2 C3 F1 F2 F3 A/R X A/R Y A/R Z M LX Security A Security B AAA AA A BBB Regulators Due diligence Issuing bank Loan and borrower data Loan securitization: investor value approach I. Loans A B D C E F Investors Security B C3 F3 LX M III. Unbundled view Investors ► Risk models ► Reconciliations ► Improved reporting ► Fraud resolution A B D C E F
  28. 28. Page 27 EY Global Blockchain Summit Asset scan: uncovering hidden assets
  29. 29. Page 28 EY Global Blockchain Summit Servicer Master servicer Calculation agent Trustee Bond administrator Originator Investor Administration and reporting processes and data flows Data flow considerations PaymentC Due diligenceA Reconciliation: (i) data tape, (ii) delinquency and default B B B B B Issuer and underwriter B B C C Processes Payment informationC Due diligence dataA (i) Data tape, (ii) original loan information B A B A C C * *Indicates later-stage investment and certain asset classes Affiliates Loan securitization: servicing function Current state
  30. 30. Page 29 EY Global Blockchain Summit Servicer Master servicer Calculation agent Trustee Bond admin Originator Investor Administration and reporting processes and data flows Data flow considerations PaymentC Due diligenceA Reconciliation: (i) data tape, (ii) delinquency and default B B B B B Issuer and underwriter B B C C Processes Payment informationC Due diligence dataA (i) Data tape, (ii) original loan information B A B A C C *Indicates later-stage investment and certain asset classes Affiliates Loan securitization: servicing function Future state * X X X X X X X X X X XX
  31. 31. Page 30 EY Global Blockchain Summit Blockchain data marketplace
  32. 32. Page 31 EY Global Blockchain Summit I. Loans A B C E F D A B C D E F Regulators Other participants II. Blockchain-enabled marketplace 1 Upload data sets1 How it works 1 1 Issuer Credit card company Blockchain-enabled marketplace A B D C E F
  33. 33. Page 32 EY Global Blockchain Summit I. Loans A B C E F D A B C D E F Regulators Other participants II. Blockchain-enabled marketplace 1 Upload data sets1 How it works 1 1 Issuer Credit card company Blockchain-enabled marketplace 2 Dynamic identity creation 2 F Loan position Borrower position A B D C E F
  34. 34. Page 33 EY Global Blockchain Summit I. Loans A B C E F D A B C D E F Regulators Other participants II. Blockchain-enabled marketplace 1 Upload data sets1 How it works 1 1 Issuer Credit card company Blockchain-enabled marketplace F Loan position Borrower position 2 Dynamic identity creation 2 Regulators Due diligence Issuing bank Investors III. Reporting 3 Rating agency 3 Autonomous position reporting 3 A B D C E F
  35. 35. Page 34 EY Global Blockchain Summit Key contact Obreahny O’Brien +1 212 360 9523 obreahny.obrien@ey.com Twitter @Obreahny LinkedIn: https://www.linkedin.com/in/obreahny
  36. 36. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2017 EYGM Limited. All Rights Reserved. EYG no. 04033-173GBL 1705-2288253 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com

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