Cross-border securities transactions involving multiple jurisdictions
These days we hear a great deal about cross-border securities transactions—in other words, transactions involving multiple countries or jurisdictions which, by definition, cross over the borders between them. Foreigners represent the vast majority of shareholders in Japanese listed stocks, and they control around 30% of aggregate market value. A foreign investor wishing to purchase Japanese shares is required to engage the services of several different financial institutions, including a foreign stockbroker (along with their representative in Japan) and a custodian* to administer their investment assets (along with their representative in Japan). Given that every trade passes through multiple financial institutions in different jurisdictions, it can take up to three days between confirmation of the contract of sale by the stock exchange and completion of actual settlement for the transaction.
During this period, the investor’s money remains exposed to various risks, such as bankruptcy and variation in the share price. While faster settlement is seen as important in order to minimize risk exposure, it is widely considered to be too costly in terms of system administration. For this reason, little progress has been made to date.
* The custodian is the financial or other institution that holds custody of shares and securities on behalf of the investor, and also processes dividends and exercises voting rights where applicable.
Using blockchain technology to speed up cross-border securities settlements
Mizuho Bank, Fujitsu and Fujitsu Laboratories have been trialing a new system designed to significantly reduce the settlement period for cross-border securities transactions. Using blockchain technology* that makes unauthorized interference with transaction history virtually impossible, the system introduces a much simpler settlement process that is completed almost instantaneously—a substantial improvement on the current wait period of three days.
Blockchain is a network-based authentication system that provides reliable consensus. Best known as the virtual currency platform for Bitcoin, blockchain works on the principle of distributing data among computers all over the world. Under the current system, global securities settlement processes have to pass through a host of third-party institutions, including the investor’s stockbroker and custodian bank and the beneficiary’s stockbroker and custodian bank. It is difficult and time-consuming to track the progress of the investor’s purchase intentions, or to establish the precise date of final settlement. Despite financial institutions pouring resources into standardization of data formats and various forms of automation, in many cases investors still have little idea how long settlement is going to take.
Blockchain uses a dispersed computer network, which allows both buyer and seller to monitor the progress of settlement in close to real time. This represents a major breakthrough with the potential to massively reduce the settlement period for global transactions (currently T+3 or three days) while at the same time delivering significant improvements in reliability and security.
The trial uses the Open Assets Protocol** blockchain implementation in the Fujitsu cloud environment. A block contains all the information for a single trade—securities name, quantity of securities, currency code, amount, country of settlement, settlement type, settlement date. The system links blocks together sequentially to generate blockchains, which afford excellent protection against unauthorized access and tampering. Blockchains are designed to provide a high level of security while permitting access by authorized financial institutions so that settlements can be processed almost instantaneously.
Blockchain technology provides a low-cost, low-risk solution for facilitating cross-border securities transactions. It supports secure and protected data access and instantaneous settlement services without the need to design and build a massive new dedicated settlement system.
* A system where multiple computers connected to a network share and mutually confirm information such as exchange records. Because it lacks a specific manager, it is resistant to tampering and attack.
** A protocol that represents assets, such as stocks (-execution information and so forth), over the transactions of the virtual currency Bitcoin. .
More efficient with less risk
For the blockchain trial, Mizuho Bank has contributed expertise in securities settlement processes, while Fujitsu and Fujitsu Laboratories have been responsible for development, testing and evaluation of the system. The trial formally concluded in February 2016.
Mizuho is a leader among domestic banks in the area of settlement systems, while Fujitsu and Fujitsu Laboratories have considerable experience and expertise in the design and implementation of accounting systems as well as blockchain technology. The joint partners will combine their respective skillsets in working to build a fast, efficient and reliable settlement system for cross-border securities transactions that minimizes exposure to price fluctuation risk.