Northern Trust Turns to DLT for the Future

Though the allure of distributed-ledger technology has waned for large-scale use within the capital markets, some market participants, such as Northern Trust, are still investing in the technology because execs there believe it has the potential to offer valuable change over the next decade for targeted use-cases. 

In a whitepaper published in October reimagining what custody will look like in 10 years, Northern Trust details how over the past decade, global custodians have moved away from their traditional roles and begun providing additional services around cybersecurity, artificial intelligence, cloud computing, data analytics, and blockchain development. It predicts that in the coming decade, technologies such as DLT will be crucial to custodians as the issuance of digital securities increases and new settlement platforms emerge.

“By 2030, custodians will be providing a new, collaborative ecosystem where both digital and traditional electronic solutions exist side-by-side. The custodians of 2030 will be client-centric and focused on asset safety. But they will also be flexible, agile, creative, and digital in ways we haven’t seen before,” the firm writes in the whitepaper.

The world of securities services has evolved from when buying a stock in a company involved the delivery of physical certificates to prove that you own some part of that company to a point where certificates—and even the securities themselves (such as 2018’s world-first blockchain bond, issued by the World Bank and Commonwealth Bank of Australia)—are now digital.

One of Northern Trust’s previous efforts using DLT was a solution for private equity firms to open, manage, and administer funds. It has since transferred this DLT platform for private equity asset servicing to Broadridge to develop further. It is also working with Singapore-based BondEvalue to deliver integrated asset-servicing and digital solutions for fractional ownership of fixed-income bonds.  

Danielle Henderson-Gerace, head of market advocacy and innovation research for Asia-Pacific at Northern Trust, says moving from electronic to digital will change how assets are issued, exchanged, and settled. This could lead to entirely new digital securities across all asset classes, including bonds, private equity, exchange-traded funds, special purpose vehicles, precious metals, real estate, and others. 

“Distributed ledger is part of that story and the flexibility of what you can do with that digitalization of asset classes. That has required custodians to think about the future and have a pathway to develop capability and active experimentation, and give our clients confidence that we’re going to be ready when that’s our new normal,” she says.

Henderson-Gerace, who leads a team focused on researching, incubating, and experimenting with various technologies so Northern Trust can bring real-world solutions to its clients, believes that within 10 years, these new digital asset classes and market infrastructures will co-exist—at least for a period of time—alongside those traditional electronic marketplaces.

“If you think about what DLT enables, it is the data, the processes, the lifecycle management, and efficiency. But as we said, the big shift in that sort of custody reimagined is not just [that] we keep it safe, we process, we administer. … Technology is going to play a greater role and change the way we offer expertise in security servicing,” she says. 

When asset safety is ensured, and data is transparent, distributed and accessible, the custodian’s job would be to use analytics and AI to create personalized experiences for how investment managers access information, and to support actionable insights. 

An example that Northern Trust is practicing internally is using cognitive document analysis for unstructured data. Henderson-Gerace says this process has been applied to legal agreements, and is particularly useful when looking at inconsistent clauses covering one particular aspect of regulatory management. 

“You can train software now to analyze and identify common clauses. Lawyers can navigate and train the machine to find that specific clause, so what was historically a three-month job among seven lawyers can be essentially a two-week process. … This unstructured data could be in documents generated in private funds where there’s not a lot of consistency. So, how can we use AI to help us drive both extraction and centralization of that data in a more efficient way?” she adds.

Though Henderson-Gerace declines to provide details of the projects Northern Trust is currently working on due to confidentiality issues, she says the general themes are around making new digital asset classes available in existing marketplaces and systems, and bringing them up to regulatory and institutional-grade standards. 

Recently, during a Hong Kong FinTech Week 2020 panel, Nasdaq and HKEx noted that the potential for blockchain technology to disrupt the exchange market is a “bit of an overstatement.” That aside, the exchanges noted that the technology could provide a good foundation for entirely new markets.