An association between five prominent central security depositories (CSD), being called the CSD Working Group On DLT (distributed ledger technology), has released requirements for a proxy-voting product at the International Securities Services Association (ISSA) Operational Committee meeting held on April 24, in London. The document called “General Meeting Proxy Voting On Distributed Ledger: Product Requirements” is a technical analysis of data compiled from October 2016 until the London meeting, and details every technical aspect of a proposed reference product for proxy voting. The working group was tasked with capturing new business value via blockchain, without rewriting the established business practices already in place. The association included: Russia’s National Settlement Depository, South Africa’s Strate, Six Securities Services from Switzerland (which maintains a close partnership with the Luxembourg-based International Central Securities Depository), Nasdaq’s Nordic and Baltic subsidiary, and Chile’s Deposito Central de Valores.
A central securities depository is a specialized financial institution that holds, protects, and transfers securities, whether physical or electronic, for and between clients. Usually comprised of custodian banks, CSDs function as clearinghouses for financial instruments by serving as a central point of deposit from which a security is issued, kept safe, and reaches settlement. Four main requirements for voting during shareholder meetings are described within the document. These requirements are designed to be independent of any market for flexibility purposes, and support future customization.
Functional requirements are mentioned first and pertain to participants who are able to process transactions on the distributed ledger. The three functional actor roles are defined as: Issuers or Issuer Agents, who legally issue securities; Intermediaries, who are proxy-voting agents; and Voting Parties, who use their power to adjudicate the agendas and resolutions of shareholder meetings. The group further analyzes how these three functional actor roles will behave when working with a distributed ledger instead of traditional systems. These considerations include the full spectrum of organization for a shareholder meeting. Initialization is explored on a theoretical blockchain alongside notification, ownership record loading, voting right allocation, party authentication, proxy assignment, voting, meeting management, and post-meeting actions to be taken.
Secondly, the CSD Working Group on DLT analyzed how trust requirements add value. After establishing how double-checking, audits, reconciliation, and other validation processes can be replaced by the trust mechanism intrinsic to distributed ledgers, the working group elaborated on how “an immutable golden copy of all data” can dramatically decrease unmitigated risk. Specific analysis included study of data tampering, compromising access to confidential data, and infrastructure failures. Enterprise Architect of Russia’s National Settlement Directory (NSD) Alexander Chekanov described how blockchain transparency can provide trust in shareholder meetings:
“Proxy voting has served as an excellent business case where the advantages are both visible and easy to achieve without causing a major disruption on the market. For NSD in particular, it is one of the many steps that we take to make Russian post-trade infrastructure more open and reliable for both the local market and internationally.”
Monica Singer, CEO of Strate, echoed her Russian counterpart’s sentiments:
“Distributed ledger technology has opened the doors to a new world of how people can transact and we’re excited to be an integral part of this journey, where we’re changing history. Together with other working group members, we have embraced this technology to improve the financial markets and are excited at the progress being made on proxy voting using distributed ledger technology.”
Thirdly, the working group analyzed data entities on a blockchain. This section studied how particular sets of data are stored in specific ways that must be accessible by all participants in accordance with their access privileges. Data rights may be changed as local requirements change, but the working group found that general data rights should be set for all participants in any global market.
Finally, non-functional requirements are addressed. The working group elaborated on eleven sub-requirements:
- Availability – the system must have round-the-clock access;
- Data integrity – the system must create audit trails;
- IT environment – the system must allow for internal testing;
- Interoperability – the system must interact with other systems;
- Performance – the response time from click to on-screen response must be under a second;
- Recoverability – if a worst case scenario were to present itself, the system must be recoverable to a valid state in no more than a single day;
- Regulatory – the system must not produce new risk;
- Reliability – the system must have built-in redundancy;
- Scalability – meeting sizes of 100,000 voting parties are required, and the system must handle no fewer than 50 transactions per second and run multiple meetings in parallel;
- Security – cryptographic keys must be used in support of hardware security modules; and
- Usability – the system must provide responsive user interfaces for smartphones, tablets, and personal computers.
While the document goes to great length to describe the technical reference tool recommended by the CSD Working Group, not every implementation process is outlined.
“There are notable topics which are not covered in the document. Among them are the technological architecture of the solution and the integration methodology between systems built according to these requirements.”
The working group specifically did not analyze architecture solutions because future architectures are likely to be built around localized solution features and “organizations implementing these requirements will use their own judgment to design the most efficient architecture for their solutions.” Correspondingly, integration methodologies have also been left unanalyzed as the working group “sees the global context as a key opportunity in this effort, and shared common requirements are the first step towards defining a methodology for DLT standardization.”
The working group is continuing its research on the business use cases for proxy voting on distributed ledgers. Future areas of consideration are listed as being the distillation of business value for market participants and infrastructure, the standardization of existing markets practices with ISO20022 standards, and the creation of extensions to connect with more markets worldwide.