The definition of “Fintech” used in both the EU Action Plan and the HM Treasury Fintech sector strategy (almost the same as the one in the FSB’s Fintech page) – “technology-enabled innovation in financial services” – would at various stages in history have encompassed the invention of the telex, the adding machine, and the abacus. It is often described as “disruptive” and may well be so as regards mobile banking, peer to peer lending and crowdfunding and so on. In other areas its impact will be undramatic and incremental, simplifying and speeding up admin. For example, its potential application to derivatives contracts is obvious. It is not difficult to see how:
- a standard paper-based swap confirmation, with a routine set of fields defining rates, dates, parties, date count fractions and so on, could be reduced to a stream of computer code;
- that code could include instructions to obtain a floating rate from a defined pricing source on a specified date and time, to make a defined calculation at agreed intervals based on that rate, and then generate an automatic payment instruction by the paying party to its bank to pay the calculated amount to the other party
- the code could include sub-routines to identify whether the swap had to be cleared, and if so could automatically clear it via the correct CCP, and ancillary functions could be used to deal with daily margining, internal risk management and reporting, and so on.
Similarly, the settlement and clearing of market deals – debt, equities and derivatives – can benefit from greater automation. Eliminating the need for retyping data reduces the scope for keying errors, and speeds up doing the post-agreement admin. In many cases the key is to agree on industry standards, and standardisation is a focus of the 2018 EU Fintech Action Plan and a priority for ISDA. With all the talk and inevitable hype that surrounds anything to do with IT, bear in mind that this is still preliminary. For example, the ISDA “Common Domain Model” announced in February: ISDA has appointed a consultancy to “help it develop a digital version” which would bring us “closer to” [not “arrive at“] “a common set of process and data standards that will increase automation and efficiency in the derivatives market”. The agenda for ISDA’s conference next month entitled “ISDA Common Domain Model, Smart Contracts and Distributed Ledger – Opportunities for increasing efficiency in derivatives markets and legal implications”, shows this: it asks how this can “lay the foundations” for smart contracts, what a smart derivatives contract is, and “where do we begin?”