The Future of Financial Infrastructure

The future of financial infrastructure An ambitious look at how blockchain can reshape financial services An Industry Project of the Financial Services Community | Prepared in collaboration with Deloitte Part of the Future of Financial Services Series • August 2016

Foreword Consistent with the World Economic Forum’s mission of applying a multistakeholderapproach to address issues of global impact, creating this report involved extensive outreach and dialogue with the Financial Services Community, Innovation Community, Technology Community, academia and the public sector. The dialogue included numerous interviews and interactive sessions to discuss the insights and opportunities for collaborative action. Sincere thanks to the industry and subject matter experts who contributed unique insights to this report. In particular, the members of this Financial Services Community project’s Steering Committee and Working Group, who are introduced in the Acknowledgements section, played an invaluable role as experts and patient mentors. We are also very grateful to Deloitte Consulting LLP in the US, an entity within the Deloitte1 network, for its generous commitment and support in its capacity as the official professional services adviser to the World Economic Forum for this project. Contact For feedback or questions: R. Jesse McWaters [email protected] +1 (212) 703 6633 1 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. WORLD ECONOMIC FORUM | 2016 2

The Distributed Ledger Technology project is the most recent phase of the Forum’s ongoing Disruptive Innovation in Financial Services work 2015 2016 THE FUTURE OF FINANCIAL SERVICES BEYOND THE FUTURE OF FINANCIAL SERVICES The Future of Financial Services project explored the landscape This phase of the disruptive innovation work explores two topics of disruptive innovations in financial services, provided the first with key potential as foundational enablers of future disruption consolidated taxonomy for these disruptions, and explored their potential impacts on the structure of the industry The future of financial infrastructure: An ambitious look at how blockchain can reshape financial services This project explores the potential for distributed ledger technology to transform the infrastructure of the financial services industry A Blueprint for Digital Identity: The Role of Financial Institutions in building Digital Identity This project explores the potential for digital identity in financial services and beyond and lays out a blueprint for the implementation of effective digital identity systems WORLD ECONOMIC FORUM | 2016 3

Contents Acknowledgements.......................................................................................................................................................................................... 5 Executive Summary Context and Approach….…………………..…………………………………………………………………………………………………………………………………………………. 13 Key Findings..………………………………………………………………………………………………………………………………………………………………………………………. 17 Use Case Deep-Dives Approach….…………………………………………………………………………………………………………………………………………………………………………………………. 32 Summaries….………………………………………………………………………………………………………………………………………………………………………………………. 37 Modules Payments: Global Payments......................................................................................................................................................................................... 46 Insurance: P&C Claims Processing................................................................................................................................................................................ 56 Deposits and Lending: Syndicated Loans...................................................................................................................................................................... 65 Deposits and Lending: Trade Finance........................................................................................................................................................................... 74 Capital Raising: Contingent Convertible(“CoCo”) Bonds............................................................................................................................................. 83 Investment Management: Automated Compliance..................................................................................................................................................... 92 Investment Management: Proxy Voting....................................................................................................................................................................... 101 Market Provisioning:Asset Rehypothecation............................................................................................................................................................... 110 Market Provisioning: Equity Post-Trade....................................................................................................................................................................... 119 Contact Details................................................................................................................................................................................................. 128 WORLD ECONOMIC FORUM | 2016 4

Section 1 Acknowledgements WORLD ECONOMIC FORUM | 2016 5

Acknowledgements Members of the Steering Committee The following senior leaders from global FIs provided guidance, oversight and thought leadership to the Future of Financial Services series as its Steering Committee: Robert Contri Kim Hammonds Anju Patwardhan Vice Chairman, Global Chief Operating Officer and Chief Venture Partner, Deloitte & ToucheLLP Information Officer, Deutsche Bank CreditEase Ann Cairns Jason Harris David Puth President, International Markets, Chief Executive Officer, International Chief Executive Officer, MasterCard Property and Casualty, XL Group CLS Bank International David Craig Michael Harte William Sheedy President, Financial and Risk, Chief Operations and Technology Officer, Global Executive, Corporate Strategy, Thomson Reuters Barclays M&A, Government Relations, Visa John Flint Axel Lehmann Dieter Wemmer Chief Executive Officer, Retail Banking and Group Chief Operating Officer and Member Chief Financial Officer, Wealth Management, HSBC of the Group Executive Board, UBS Allianz WORLD ECONOMIC FORUM | 2016 6

Acknowledgements Members of the Working Group The project team would also like to acknowledge the following executives of global FIs who helped define the project framework and shape strategic analyses as its Working Group: Tom Brown Victor Matarranz Bob Reany Partner, Senior Executive Vice-President, Strategy, and Senior Vice-President and Group Head, Paul Hastings Executive Chairman’s Office, Santander Identity Solutions, MasterCard Christof Edel Neil Mumm Peter Rutland Global Head, Strategy and Business Vice-President, Corporate Strategy, Partner, Global Co-Head of Financial Services, Development, Financial, Thomson Reuters Visa CVC Capital Partners Rob Galaski (Project Advisor) Max Neukirchen Nicolas de Skowronski Head of Financial Services, Managing Director and Head, Strategy, Chief of Staff, Deloitte Canada JP Morgan Chase Bank Julius Baer Dorothy Hillenius Christine O’Connell HuwVan Steenis Director, Corporate Strategy, Global Head of Strategy, Risk, Managing Director and Head, Financial ING Thomson Reuters Services Research, Morgan Stanley Marc Lien Robert Palatnick Colin Teichholtz Director, Innovation and Digital Development, Managing Director and Chief Technology Partner and Portfolio Manager, Lloyds Banking Group Architect, DTCC Pine River Capital Management Matthew Levin Kosta Peric FabienVandenreydt Executive Vice-President and Head, Global DeputyDirector, Financial Services for the Global Head, Securities Markets, Innotribe & Strategy, Aon Corporation Poor, Bill & Melinda Gates Foundation the SWIFT Institute, SWIFT Lena Mass-Cresnik, PhD Justin Pinkham Head, Innovation, Strategic Product Senior Business Leader, Strategic Initiatives, Management, BlackRock MasterCard WORLD ECONOMIC FORUM | 2016 7

Acknowledgements List of subject matter experts In addition, the project team expresses its gratitude to the following subject matter experts who contributed their valuable perspectives through interviews and workshops (in alphabetical order): Meyer Aaron Bank of Canada James Colaco Deloitte Canada Mark Adams Australian Securities and Investments Commission Robert Cranmer Deloitte Canada Mark Adams National Australia Bank Neil Cross DBS Bank Keith Ajmani TD Bank Group Stephen Cross Aon Andrew Alexandratos Australian Prudential Regulation Authority Dame Damevski inpay Robleh Ali Bank of England Andrew Davis Stone & Chalk Jeremy Allaire Circle Shellie Davis Commonwealth Treasury Sarah Andrews Thomson Reuters Avery Dellheim Circle Angus Armour Business Council of Australia Thomas DeLuca AMP Credit Technologies Akhtar Badshah Catalytic Innovators Group Nigel Dobson ANZ Murad Baig Deloitte LLP Kirsten Dunlop Suncorp Group Steven Bardy Australian Securities and Investments Commission John Edge Identity2020 Nick Beecroft Lloyd's of London Anna Ewing Nasdaq Adi Ben-Ari Applied Blockchain Scott Farrell King & Wood Mallesons Peter Berg Visa Usama Fayyad Barclays Michael Bodson Depository Trust & Clearing Corporation Daniel Feichtinger Digital Asset Holdings Sven Bossu SWIFT Karin Flinspach Standard Chartered Andre Boysen SecureKey Technologies Brian Forde MIT Media Lab Carolyn Burke RBC Mary Ann Francis Wipro Ross Burnett Macquarie Group Conan French Institute of International Finance Oliver Bussman UBS Steve Gallagher Australian Prudential Regulation Authority Claire Calmejane Lloyds Banking Group Emilio Garcia de la Sierra Santander InnoVentures Nick Caplan Faster Payments Nicholas Giurietto Australian Digital Currency & Commerce Association Alicia Carmona Identity2020 Julian Gorman GSMA Michael Casey MIT Media Lab Udayan Goyal Anthemis Group SA Stephen Catchpole Macquarie Group Michael Gronager Chainalysis Javier Celaya Banco Santander S.A. Joe Guastella Deloitte Consulting LLP Matthew Chan Depository Trust & Clearing Corporation Aran Hamilton Vantage Christophe Chazot HSBC Bank Plc Aldila Hananto Telstra Ilsa Christ Australian Transaction Reports and Analysis Centre Anna Harper SocietyOne Lynne Cockerell Reserve Bank of Australia Adrienne Harris Council of Economic Advisers WORLD ECONOMIC FORUM | 2016 8

Acknowledgements List of subject matter experts (cont.) In addition, the project team expresses its gratitude to the following subject matter experts who contributed their valuable perspectives through interviews and workshops (in alphabetical order): Oliver Harvey Australian Securities and Investments Commission Joanna Marathakis Deloitte Transactions & Business Analytics LLP Andrew Hauser Bank of England Blythe Masters Digital Asset Holdings Ian Hill Westpac Group Lukas May Transferwise Steven Holzer Citi Richard McCarthy Perpetual Limited Matt Hooper Barclays Mark McDonald QIC Chuck Hounsell TD Bank Group Todd McDonald R3CEV Gys Hyman Deloitte Consulting LLP Claire McFarland Commonwealth Department of Industry, Innovation and Science Raj Iyer Bloomberg LP Richard Miller Deloitte Australia Chetan Jain Inspira Enterprise John Moss UBS Kevin Johnson SWIFT Eddie Niestat Novantas Ashton Jones Macquarie Group Kevin Nixon Deloitte Australia Eiichi Kashiwagi Bank of Tokyo-Mitsubishi UFJ Madan Oberoi INTERPOL Steffen Kern European Securities and Markets Authority Dan O'Prey Digital Asset Holdings Andrew Keys Consensys Cheryl Parker Rose Consumer Financial Protection Bureau Dan Kimerling Silicon Valley Bank Bharat Patel Australian Securities and Investments Commission Philipp Kroemer Commerzbank AG Jon Perkinson Deloitte Australia Matthias Kroner Fidor Bank AG Guy Picone Suncorp Group Ashwin Kumar Deutsche Boerse Eric Piscini Deloitte Consulting LLP Jo Lambert Paypal Rick Porter Deloitte & Touche LLP Jo Lang R3CEV Dan Quan Consumer Financial Protection Bureau Chris Larsen Ripple Dilan Rajasingham Commonwealth Bank Mikkel Larson DBS Bank Rhomaios Ram Deutsche Bank Matthew Leavenworth Bank of America Suresh Ramamurthi CBW Bank Ian Lee Citi Ventures Dilip Rao Ripple Leo Lipis Lipis Advisors Tara Richards National Australia Bank Joel Lipman Deloitte Australia Alex Rinaldi Deloitte Canada James Lloyd EY Alex Rozman Deloitte & Touche LLP Sharon Lu Tyro FinTechHub Wiebe Ruttenberg European Central Bank Joseph Lubin Consensys Joel Sacmar Daon Adam Ludwin Chain Joy Savage Deloitte Canada Christian Lundkvist Consensys Rocky Scopelliti Telstra WORLD ECONOMIC FORUM | 2016 9

Acknowledgements List of subject matter experts (cont.) In addition, the project team expresses its gratitude to the following subject matter experts who contributed their valuable perspectives through interviews and workshops (in alphabetical order): Angus Scott Euroclear Sabrina Sdao Deloitte Canada Anton Semenov Commerzbank AG Beth Shah Digital Asset Holdings Rajesh Shenoy Citi Makoto Shibata Bank of Tokyo-Mitsubishi UFJ Matthew Spoke nuco Elizabeth Stark Lightning Network Maxwell Sutton Reserve Bank of Australia Paul Szurek Blockchain Michael Tang Deloitte Canada Don Tapscott The Tapscott Group Alison Tarditi Commonwealth Superannuation Corporation Simon Taylor 11:FS Adizah Tejani Level39 Craig Tillotson Faster Payments Keith Tippell SWIFT Marcus Treacher Ripple Alan Tse Commonwealth Treasury Hedi Uustalu Nasdaq Peter Vander Auwera SWIFT Wayne Vaughn Tierion Chris Wasden Univerity of Utah Casey Wilcox Paretix Shane Williams UBS Greg Williamson JPMorgan Chase & Co. Jeremy Wilson Barclays Lawrence Wintermeyer Innovate Finance Jerry Yohananov SocietyOne Tom Zschach CLS Bank WORLD ECONOMIC FORUM | 2016 10

Acknowledgements Project team and core team Project Team Core Team The “The future of financial infrastructure: An ambitious look at The World Economic Forum expresses its gratitude to the how blockchain can reshape financial services” project team following individuals on the project core team from Deloitte for includes the following individuals: their contribution and support throughout the project: World Economic Forum Project Team Vikas Singla Giancarlo Bruno, Senior Director, Head of Financial Services Chris Talley Industries Mayank Singhal Jesse McWaters, Project Lead, Disruptive Innovation in Financial Roberto Durscki Services Professional Services Leadership from Deloitte Rob Galaski Soumak Chatterjee WORLD ECONOMIC FORUM | 2016 11

Section 2 Executive Summary WORLD ECONOMIC FORUM | 2016 12

Section 2.1 Context and Approach WORLD ECONOMIC FORUM | 2016 13

Distributed ledger technology (DLT), more commonly called “blockchain”, has captured the imaginations, and wallets, of the financial services ecosystem 24+countries currently Global investing in DLT interest Research Bank 2,500+ patents filed over experimentation 80% of banks predicted to the last 3 years initiate DLT projects by 2017 Consortium DLT activity Venture 90+ corporations have joined efforts capital Over US$ 1.4 billion in blockchain consortia Central investments over the past 3 years banks 90+central banks engaged in DLT discussions worldwide Awareness of DLT has grown rapidly, but significant hurdles remain to large-scale implementation An uncertain and unharmonized Nascent collective An absence of formal legal regulatory environment standardization efforts frameworks WORLD ECONOMIC FORUM | 2016 14

This report aims to complement existing distributed ledger technology research by providing a clear view into how financial service functions can be reimagined Past approaches Our approach Future approaches Top-down approach Bottom-up approach Address pain-points within select Identify transformative potential financial service functions across all financial service functions Solution-first methodology Problem-first methodology The potential for future Identify current-state issues and envision Understand business domains drive approaches will be explored at future-state through DLT capabilities adoption of DLT capabilities the conclusion of Section 2: Executive summary Technology focus Business-process focus Position advances as having significant Question orthodoxies and acceptthat disruptive impact to business models DLT is one of many available tools Important elements covered within this report Important elements not covered within this report • This report presents nine use cases that highlight potential • This report does not cover real-economy applications applications, which participants can utilize to assess feasibility • This report does not explore applications outside of financial • This business process-level analyses articulate how to: economies and their potential to foster financial inclusion o Overcome current-state pain points through DLT • This report does not evaluate the setup and transition costs o Drive dialogue around key critical conditions associated with a distributed ledger technology implementation o Provide basis for quantitative analyses to be conducted • This report does not predict implementation and technical • This report identifies financial service orthodoxies that may be considerations called into question through distributed ledger technology NOTE: Please reference Section 3: Use case deep-dive approach to learn WORLD ECONOMIC FORUM | 2016 more about our underlying focus and assumptions across our analysis. 15

This analysis was based on over 12 months of research, engaging industry leaders and subject matter experts through interviews and multistakeholder workshops Received guidance from thought leaders Conducted interviews and solicited Engaged leaders in academia, across global financial institutions input from subject matter experts government and regulation Global workshops Five multistakeholder workshops at global financial hubs, with 200+ total participants, including industry leaders, innovators, subject matter experts and regulators Singapore New York, USA London, UK Davos, Switzerland Sydney, Australia Oct. 2015 Nov. 2015 Dec. 2015 Jan. 2016 Apr. 2016 WORLD ECONOMIC FORUM | 2016 16

Section 2.2 Key Findings WORLD ECONOMIC FORUM | 2016 17

1 2 3 4 5 6 The World Economic Forum’s analysis has yielded six key findings regarding the implications of distributed ledger technology (DLT) on the future of financial services Key findings 1 DLT has great potential to drive simplicity and efficiency through the establishment of new financial services infrastructure and processes 2 DLT is not a panacea; instead it should be viewed as one of many technologies that will form the foundation of next- generation financial services infrastructure 3 Applications of DLT will differ by use case, each leveraging the technology in different ways for a diverse range of benefits 4 Digital Identity is a critical enabler to broaden applications to new verticals; Digital Fiat (legal tender), along with other emerging capabilities, has the ability to amplify benefits 5 The most impactful DLT applications will require deep collaboration between incumbents, innovators and regulators, adding complexity and delaying implementation 6 Newfinancial services infrastructure built on DLT will redraw processes and call into question orthodoxies that are foundational to today’s business models These key findings are explored in depth in the following pages, based on the use case deep-dives conducted across financial services. WORLD ECONOMIC FORUM | 2016 18

1 2 3 4 5 6 Distributed ledger technology has great potential to drive simplicity and efficiency through the establishment of new financial services infrastructure and processes The following six key value drivers for DLT were identified through the in-depth examination of nine use cases from across financial services. Value drivers 1 Operational simplification DLT reduces / eliminates manual efforts required to perform reconciliation and resolve disputes 2 Regulatory efficiency improvement DLT enables real-time monitoring of financial activity between regulators and regulated entities Counterparty risk reduction 3 DLT challenges the need to trust counterparties to fulfil obligations as agreements are codified and executed in a shared, immutable environment 4 Clearing and settlement time reduction DLT disintermediates third parties that support transaction verification / validation and accelerates settlement 5 Liquidity and capital improvement DLT reduces locked-in capital and provides transparency into sourcing liquidity for assets 6 Fraud minimization DLT enables asset provenance and full transaction history to be established within a single source of truth WORLD ECONOMIC FORUM | 2016 19

1 2 3 4 5 6 Distributed ledger technology is not a panacea; instead it should be viewed as one of many technologies that will form the foundation of next-generation financial services infrastructure Over the last 50 years, technology innovation has been fundamental to financial services industry transformation. Today, multiple technologies poised to drive the next wave of financial services innovation are converging in maturity. 1960s s 1970s 1980s 1990s 2000s 2010s Emerging technologies future rto sor cdu ces ls no pro na s rks t s e Biometrics cmi cro ainframes rmid PC cal two vice obil Cloud computing eS mi M Te an Lo ne Interne Smartde M Cognitive computing Distributed ledger technology Machine learning / Allowed the Enabled batch Automated Enabled data Facilitated the Created a new Spearheaded predictive analytics replacement of overnight banks centres, global exchange of medium to interact frictionless physical recording processing and branches intranets data and enabled a with clients and payments Quantum computing by digital data and facilitated and corporate series of collect data offline remote systems international Robotics banking businesses Credit Messaging ATMs Electronic Digital DLT is one of many transformative new cards services (e.g. SWIFT) trading banking technologiesthat will shape future financial services infrastructure and should be seen as part of a toolbox WORLD ECONOMIC FORUM | 2016 20

1 2 3 4 5 6 Applications of distributed ledger technology will differ by use case, each leveraging the technology in different ways for a diverse range of benefits Examples of DLT value drivers and benefits Use case Value driver Benefits Trade Operational simplification Enables real-time multi-party tracking and management of finance letters of credit, and enables faster automated settlement Automated Regulatory efficiency Provides faster and more accurate reporting by automating compliance improvement compliance processes that draw on immutable data sources Global Enables the near real-time point-to-point transfer of funds payments Settlement time reduction between financial institutions (FIs), removing friction and accelerating settlement Asset Liquidity and capital Provides market participants with an improved line of sight into rehypothecation improvement assets, enabling improved risk evaluation and decision-making WORLD ECONOMIC FORUM | 2016 21

1 2 3 4 5 6 Digital Identity is a critical enabler to broaden applications to new verticals; Digital Fiat (legal tender), along with other emerging capabilities, has the ability to amplify benefits Digital identity Digital fiat Future innovations Correct identity information is critical to DLT systemsare frequently denominated The adventof the fourth industrial teta ensuring financial transactions are accurate with tokens that are native to the system – revolution is rapidly altering the financial st and compliant – but integrating physical but users of formal financial infrastructure system and broader economy through the nre identity protocols with DLT creates frictions will demand high levels of liquidity exponential acceleration of innovation rCu and increases the potential for errors between assets on the system and fiat currency rble Afully digital system for storing and Distributed fiat currencies issued by central Opportunities for integration may emerge an transferring identity attributes could be banks could be employed within between distributed financial e directly integrated into distributed financial distributed financial infrastructure, infrastructure and a range of innovations, tyiliinfrastructure ensuring the availability of liquidity even in such as artificial intelligence or the rapidly bpa the event of systemic instability evolving internet of things aC tsfi • Faster and accurate anti-money • Settlement to liquid cash-equivalent een laundering (AML) and know-your-client tokens issued by a central bank ? b (KYC) processes • Elimination of the need for an inefficient The potential benefits of these integrations er • Seamless customer onboarding bridge between cash and new financial are highly uncertain tuFu • Improvedcounterparty matching infrastructure WORLD ECONOMIC FORUM | 2016 22

1 2 3 4 5 6 The most impactful DLT applications will require deep collaboration between incumbents, innovators and regulators, adding complexity and delaying implementation Updating financial infrastructure through DLT will require significant time and investment. Three key observations must be taken into consideration for this implementation to be successful. Key observations and insights Replacing existing financial infrastructure by DLT will Aligning key stakeholders for require significant time and collective action will require investment Infrastructure Competing difficult balancing of interests in replacement interests the face of diverging interests and zero-sum games Implementingnew financialinfrastructure will Achieving all three key observations will require changes to existing regulations, delay large-scale, multi-party DLT standards of practice, and the creation of new Legal, regulatory and implementations in highly regulated legal and liability frameworks. Specifically, the governance frameworks markets. However, if successful, these implementation of smart contracts will could enable scalable infrastructure require additional stakeholder alignment and fabrics, industry-wide solutions and governance considerations standardized processes WORLD ECONOMIC FORUM | 2016 23

1 2 3 4 5 6 a b c New financial services infrastructure built on DLT will redraw processes and call into question orthodoxies that are foundational to today’s business models Assumptions that are central to today’s financial business models will be impacted both intentionally and unintentionally by the shift to distributed financial infrastructure, requiring incumbents to adjust their business practices in response. Current-state assumptions Transformative characteristics of Implications for market participants distributed infrastructure within financial services Informationsilos drive the need for detailed reconciliation activities a) immutability Eliminates need for Provides historical single Lack of a single version of the truth and audit reconciliation version of the truth trails creates arbitrage concerns Asymmetric information between market participants drives the proliferation of central authorities b) transparency Eliminates imbalance of Increases cooperation Lack of transparency increases regulations on information among market between regulators and FIs participants regulated entities Lack of trust between counterparties creates c) autonomy the need for central authority oversight in Ensures agreements are Disintermediates supporting contract execution executed to agreed upon entities established to business outcomes resolve disputes WORLD ECONOMIC FORUM | 2016 24

1 2 3 4 5 6 a Distributed ledger technology will question the need for individual books of record through immutable and distributed record-keeping DLT provides transaction immutability, which is a key requirement for eliminating the need for an enforcer of trust in the ecosystem. Tamper-proof distributed data enables an environment in which trust is not an issue and allows counterparties to operate with a single version of the truth. Current state Traditionally, asset and transaction information was stored within physical books to independently reference previous actions internally and externally. As technologies advanced, physical books were translated into digital ledgers Today, every FI maintains its own digital “book of record” repository As a result, central intermediaries proliferate in the industry, providing unbiased reconciliation services to facilitate transactions between counterparties without requiring them to trust each other. For transactions executed internal to the organization, reconciliation is performed within lines of businesses DLT transformative potential Financial services implications At its core, DLT is a growing repository of transactions Challenges information silos between market organized in chronological blocks where the technology participants and eliminates the need for inter-firm intrinsically makes changes to previous transactions reconciliation functionally impossible Disintermediates central intermediaries and reduces the fear of arbitrage within the ecosystem DLT has been designed to replicate data among participating nodes in real time, ensuring all parties operate off of a single version of the truth at all times Enables audit trails to be established for assets and transactions with a significant reduction in disputes WORLD ECONOMIC FORUM | 2016 25

1 2 3 4 5 6 b Distributed ledger technology will significantly increase transparency between market participants Infrastructure must be capable of sharing information among all market participants. DLT builds upon a single version of the truth to provide transparency for historical and real-time transactions. Current state The age and fragmentation of large parts of existing financial infrastructure have placed limits on the degree of transparency these systems are able to offer, creating opportunities for information asymmetry As a result, some actors within the ecosystem have gained competitive advantages through the imbalance of information While some entities profit from this state of information, others experience suboptimal performance and spend excessive resources on risk hedging and liquidity guarantees DLT transformative potential Financial services implications The “default setting” of DLT is to provide full Challenges existing competitive advantage models that transparency into transactions leverage information asymmetry DLT has the potential to transform existing notions of Reduces the role of supporting entities (e.g. insurers) private records, in which transaction details are only that profit from opacity within the ecosystem known to counterparties DLT can promote the creation of a public record of Promotes discourse in the ecosystem where activity in the ecosystem to which all market participants transparency best serves market participants vs where have access in real time opacity is needed (e.g. secure personally identifiable information data) WORLD ECONOMIC FORUM | 2016 26

1 2 3 4 5 6 b Distributed ledger technology will have implications for the cost of leverage by reducing information asymmetry between borrowers and lenders DLT enables improved visibility into the ways in which assets are being employed through the tokenization of assets and a public record of transactions. Current state In a wide variety of transactions types, FIs may loan or pledge assets to provide or receive access to credit; however, limited visibility exists into how many times an asset has been loaned or pledged This limited line-of-sight into liens against an asset enables that asset to be used to secure multiple debts by the borrowers, often in excess of nominal asset value This opacity causes lenders to rely upon reputational factors and assessments by supporting entities such as rating agencies DLT transformative potential Financial services implications DLT can tokenize individual assets (e.g. property and Promotes visibility of assets and associated bonds) on a shared and trusted ledger to establish liens/ownerships to quantify risk and increase pricing provenance accuracy Reduces access to capital for borrowers by limiting the ability to use the same asset to secure leverage from DLT can provide visibility into assets and associated multiple parties liabilities based on transactional history while increasing the efficiency of credit transactions Challenges the role of rating entities in quantifying risks WORLD ECONOMIC FORUM | 2016 27

1 2 3 4 5 6 b Distributed ledger technology will transform the relationship between regulators and regulated entities, reducing frictions and improving outcomes Transactional data must provide granularity and accuracy to regulators in order to monitor and comply with regulatory obligations. DLT facilitates transparency between regulators and regulated entities through a shared repository with real-time access to data. Current state Regulated entities and regulators are increasingly challenged to support information requirements to certify compliance While regulated entities are committed to enable transparency, significant costs and risks are associated with current systems and business processes As complexity within the ecosystem and financial instruments increases, the trade-off between transparency and cost becomes a balancing act DLT transformative potential Financial services implications DLT can become a shared data repository between Transforms compliance from post-transaction regulators and regulated entities, breaking down monitoring to on-demand and immediate monitoring organizational silos Improves capability of regulators to fulfil their mandate DLT has the potential to allow subsets of transactional of ensuring the legality, security and stability of financial data to be effortlessly shared with regulators in real-time markets Improves efficiency for regulators to monitor trading DLT can facilitate ‘regulatory-inclusive’ business models, venues such as over-the-counter markets and dark pools in which regulators utilize smart contracts to verify Reduces regulatory compliance costs significantly transactions / deals in real-time WORLD ECONOMIC FORUM | 2016 28

1 2 3 4 5 6 c Distributed ledger technology will reduce the need for intermediaries by providing autonomous execution capabilities Financial agreements are enforced via a complex set of business rules and processes to ensure obligations are fulfilled by counterparties. DLT provides the ability to autonomously execute these conditions in a shared and trusted environment. Current state All transactions involving at least two market participants are governed by agreements that highlight business outcomes based on obligations that must be met by each counterparty The responsibility for ensuring these agreements are enforcements dependent on legal and regulatory frameworks As a result, the complexity of these agreements has given rise to intermediaries that mediate disputes between parties and resolve deviations within agreed upon outcomes DLT transformative potential Financial services implications DLT can codify financial agreements in a shared platform Reduces counterparty risk due to the reduced need to and guarantee execution based on mutually agreed trust counterparties’ willingness or ability to fulfil conditions, limiting unilateral counterparty actions obligations Disintermediates entities that currently mediate DLT can eliminate the manual effort required to support disputes and resolve business outcomes the execution of financial agreements and can accelerate business outcomes WORLD ECONOMIC FORUM | 2016 29

Additional research remains to assess distributed ledger technology feasibility, quantify benefits and analyze implementation details Past approaches Our approach Future approaches Top-down approach Bottom-up approach Quantitative approach Conduct DLT cost-benefit analysis across financial services functions Solution-first methodology Problem-first methodology Feasibility-centric methodology Developimplementation roadmap to achieve DLT transformative potential Technology focus Business-process focus Stakeholder alignment focus Determine if market participants are interested in achieving DLT benefits Important questions to be answered moving forward • Cost-benefit analyses need to be conducted to determine the financial viability of distributed ledger technology • Roadmaps need to be developed to achieve market participant collaboration and establish standards • Governance models, backed by societal-level discussions, need to be envisioned to support technology accountability • Regulatory, legal and jurisdictional-specific tax frameworks need to be established and well-understood To conclude our executive summary, the following page will expand on our approach and help navigate across our use case deep-dives. NOTE: Please reference Section 3: Use case deep-dive approach to learn WORLD ECONOMIC FORUM | 2016 more about our underlying focus and assumptions across our analysis. 30

This report provides comprehensive, business-process-level views of distributed ledger technology implementations within each financial services function This report’s detailed findings are designed to be consumed according to business affinity and interest. The table below shows the location of each use case, which can be read independently of each other. 1 Context and Approach Anoverview of current global DLT activity and the analysis methodology 2 Executive Summary Asummary of the use case deep-dives through six key findings 3 Use Case Deep-Dive Approach An introduction of selected use cases, the analysis structure and high-potential use case characteristics 4 Use Case Deep-Dive Summaries A summary of the key findings of each use case organized by financial services function Use Case Deep-Dive Modules Ninebusiness-process-level analyses of a use case’s current state and transformed future state enabled by DLT Each use case can be read individually according to the table below: 5 Global Payments 46 P&CClaims Processing 56 SyndicatedLoans 65 Trade Finance 74 Contingent Convertible Bonds 83 Automated Compliance 92 Proxy Voting 101 Asset Rehypothecation 110 Equity Post-Trade 119 WORLD ECONOMIC FORUM | 2016 31

Section 3 Use Case Deep-Dive Approach WORLD ECONOMIC FORUM | 2016 32

Use cases for this report were identified across each function within financial services Leveraging the financial services innovation taxonomy within the World Economic Forum’s The Future of Financial Services 2015 report, the implementation of DLT is considered across each function of financial services. Disruptive innovation DLT use cases in in Financial Services, Financial Services, June 2015 July 2016 Use case portfolio selection criteria 1. Representation of DLT implementations across various asset classes across multiple subsectors 2. Demonstration of scenarios where DLT must be implemented in a networked or single entity environment 3. Consideration of implementations that could be justified both on financial and non-financial/strategic grounds WORLD ECONOMIC FORUM | 2016 33

Use case deep-dives were conducted and summarized in a standardized format Use case deep-dives that follow a standardized format were conducted to strike a balance between the possible and practical in order to consider how the structure of financial services might be transformed by DLT. Use case deep-dive structure Introduction Current state Future state Critical conditions Conclusion Overview of Current-state Future-state Key barriers that Summary, outlook ecosystem players process description process description must be met for and unanswered and statistics and pain points and benefits DLT to be questions of use analysis analysis successful case deep-dive The goals Educate the community on the key Highlight key conditions that must Support existing conversations to 1 DLT value drivers through business- 2 be met to implement new, 3 implement DLT and initiate new process-level use cases distributed financial services discussions elsewhere infrastructure Throughout the use case deep-dives, a broad set of assumptions regarding DLT had to be developed. WORLD ECONOMIC FORUM | 2016 34

Each use case deep-dive maintained a consistent focus and set of assumptions Our focus • Understanding the direct impacts that DLT can have at the business-process level on FIs and other market participants • Analysing use cases that are broadly applicable in global financial markets, occasionally utilizing US regulations as reference points • Identifying critical conditions for the successful implementation of DLT across the following four categories: Stakeholder alignment: achievement of shared benefits Regulatory: compliance-related requirements Technology: implementation dependencies Governance: administration and liability oversight Our assumptions A note on security considerations 1. We assume that enabling capabilities (e.g. digital identity) are Similar to any technological innovation, DLT comes with a set of available to be incorporated, in conjunction with distributed risks that must be considered: ledger technology, to meet each use case’s goals securely and 1. Ensuring that distributed ledgers are secure and safeguarded effectively against errors is paramount to the long-term success of the 2. We assume that distributed ledger solutions implemented in technology and should not be treated the same as the near future will be scalable to meet volume requirements fundamentally questioning the strength of the protocol (including, in some cases, billions of transactions) 2. While smart contracts enable autonomous agreement 3. We assume data sources that are accessible by distributed execution between parties, they rely on architects and security ledgers and/or facilitate autonomy cannot be compromised experts to build business rules that prevent malicious 4. We understand that benefits realized will be contingent on behaviour, complete thorough end-to-end testing and verify all specific business models for each FI and jurisdictional code uniqueness 3. Meticulous IT controls must be in place to detect potential gaps in security across all the inputs, components and outputs of DLT WORLD ECONOMIC FORUM | 2016 35

Through the deep-dives, a number of characteristics were discovered that should be utilized to identify other high-potential use cases in financial services Through the examination of nine use cases, a set of common characteristics were identified that appeared to be shared by high- potential applications of DLT Characteristics of high-potential use cases Example A shared repository of information is Ledger that stores financial assets in which an owner and owned assets Shared repository used by multiple parties are tracked and shared with other internal/external parties (e.g. regulators and other geographical units) More than one entity generates Payments system collectively managed and maintained by a small group Multiple writers transactions that require of banks, but each bank has millions of end users transacting with their modifications to the shared bank repository Multiple parties within a trade finance arrangement (e.g. importer, Minimal trust A level of mistrust exists between exporter, issuing bank, receiving bank, correspondent banks and entities that generate transactions customs) that do not “trust” each other and, therefore, institute layers of verification and impose collateral requirements One (or multiple) intermediary or a Removing and/or reducing the importance of a central intermediary, Intermediaries central gatekeeper is present to whose primary role is to provide “trust” to the post-trade ecosystem enforce trust Interactionor dependency between A situation in which Alice needs to send funds to Bob, then Bob needs to Transaction transactions is created by different send funds to Charlie. Bob’s transaction is dependent on Alice’s dependencies entities transaction, and one cannot verify Bob’s transaction without checking Alice’s first WORLD ECONOMIC FORUM | 2016 36

Section 4 Use Case Deep-Dive Summaries WORLD ECONOMIC FORUM | 2016 37

Reading guide This section provides a summary of the findings, divided by function and DLT use cases within the function. For each use case, the key players and impact are summarized, the critical conditions to be successful are identified and the possible outcomes are examined. Function grouping DLT use case name High-level summary of potential DLT benefits Key stakeholders involved within use case Predicted financial services outcomes if DLT is successfully implemented Identified conditions that must be met for DLT to achieve determined benefits WORLD ECONOMIC FORUM | 2016 38

Use cases | Payments Global Payments Summary Money Sender and Beneficiary Money Transfer Conducting international money Regulator Operator transfers through DLT could provide real-time settlement and Local Clearing Sender reduce costs, enabling new Network Bank business models (e.g. Beneficiary micropayments), and institute SWIFT Bank newer models of regulatory Correspondent oversight Bank Implications for FIs • Real-time settlement of international money transfers can increase profitability by reducing liquidity and operational costs • Utilizing DLT will enable direct interaction between sender and beneficiary banks, and eliminate the role of correspondents • Smart contracts can capture obligations and drive reporting, minimizing operational errors and accelerating outcomes Critical conditions for implementation • Ensuring compliance via standard KYC processes • Binding legality of cryptographic hash to exchange value • Adopting standards and ensuring interoperability WORLD ECONOMIC FORUM | 2016 39

Use cases | Insurance P&C Claims Processing Summary Facilitating claims management Insuree for property and casualty (P&C) Insurer insurers on DLT can automate Reinsurer processing through smart contracts, improve assessment Supporting through historical claims Data Sources Regulator information and reduce potential Broker for fraudulent claims Implications for FIs • Smart contracts can automate claims processing through third-party data sources and codification of business rules • DLT can drive reductions in operating costs through process simplification • Storing historical claims information on the ledger will enable insurers to identify suspicious behaviour and improve assessment Critical conditions for implementation • Building a comprehensive set of asset profiles and history • Adopting standards for relevant claims data • Providing a legal and regulatory framework WORLD ECONOMIC FORUM | 2016 40

Use cases | Deposits and Lending Syndicated Loans Trade Finance Summary Regulator Lead Arranger Summary Importer Utilizing DLT to automate Utilizing DLT to store financial Correspondent Import syndicate formation, details can facilitate the real-time Banks Bank underwriting and the approval of financial documents, Customs Exporter disbursement of funds (e.g. create new financing structures, principal and interest payments) reduce counterparty risk and Freight Export can reduce loan issuance time Requesting enable faster settlement Bank and operational risk Entity Syndicate Inspection Company Implications for FIs Implications for FIs • Forming syndicates through smart contracts can increase speed and • Storing financial details on the ledger can automate the creation provide regulators with a real-time view to facilitate AML/KYC and management of credit facilities through smart contracts • Performing risk underwriting through DLT can substantially reduce • DLT can improve real-time visibility to the transaction to better the number of resources required to perform these activities institute regulatory and customs oversight • Smart contracts can facilitate real-time loan funding and automated • Utilizing DLT will enable direct interaction between import and servicing activities without the need for intermediaries export banks, and eliminate the role of correspondent banks Critical conditions for implementation Critical conditions for implementation • Building risk rating framework for syndicate selection • Providing transparency into trade finance agreements • Standardizing diligence and underwriting templates • Enabling interoperability with legacy platforms • Providing access to financial details on the distributed ledger • Rewriting regulatory guidance and legal frameworks WORLD ECONOMIC FORUM | 2016 41

Use cases | Capital Raising Contingent Convertible (“CoCo”) Bonds Summary Financial Utilizing smart contracts to Institution automate regulator reporting can minimize the need for point-in- Regulator time stress tests, reduce market volatility and, ultimately, increase “CoCo” bond issuance Investor Implications for FIs • Tokenizing bond instruments when soliciting capital from investors can enable them to make informed, data-driven decisions • Smart contracts can alert regulators when loan absorption needs to be activated, minimizing need for point-in-time stress tests • Providing investors with transparency into loan absorption can reduce uncertainty currently associated with “CoCo” bonds Critical conditions for implementation • Standardizing attributes for soliciting investments • Streamlining trigger calculations across FIs • Developing processes to act on real-time trigger notifications WORLD ECONOMIC FORUM | 2016 42

Use cases | Investment Management Automated Compliance Proxy Voting Summary Financial Summary Regulator Corporation Utilizing DLT to store financial Auditor Institution Distributing proxy statements via information can eliminate errors DLT and counting votes via smart associated with manual audit Regulator contracts may improve retail activities, improve efficiency, Internal investor participation, automate reduce reporting costs and, Revenue Accountant the validation of votes and, potentially, support deeper Service Federal potentially, enable personalized Third Party/ Investor regulatory oversight in the future Reserve analyses in the future Intermediaries Implications for FIs Implications for FIs • Storing financial information on the ledger provides immutable, • Distributing proxy statements via the distributed ledger can reduce real-time updates and facilitates automated review costs associated with printing and mailing • Executing reporting activities through smart contracts can facilitate • Smart contracts can automate the validation of votes and increase the automated creation of quarterly and annual findings the transparency of counting votes (e.g. end-to-end confirmation) • In the future, DLT can seamlessly execute and automate compliance • Storing proxy statements on the ledger may enable investors to activities (e.g. Comprehensive Capital Assessment Review) conduct personalized, automated analyses in the future Critical conditions for implementation Critical conditions for implementation • Providing compartmentalized access to data • Storing investment records on a distributed ledger • Automating faster and efficient enforcement of regulations • Integrating legacy voting mechanisms into tokens • Enabling interoperability with legacy platforms • Collaborating across actors to ensure success WORLD ECONOMIC FORUM | 2016 43

Use cases | Market Provisioning Asset Rehypothecation Equity Post-Trade Summary Broker/ Summary Custodian Dealer Bank Utilizing DLT to track and manage Utilizing DLT and smart contracts Investor asset rehypothecation via smart Regulator to facilitate post-trade activities contracts can enable the real- can disintermediate processes, Exchange time enforcement of regulatory reduce counterparty and Central control limits across the financial operational risk and, potentially, Securities system and reduce settlement Buying pave the way for reduced Central Depository time Selling settlement time Clearing Investor Investor Counterparty Implications for FIs Implications for FIs • Rating counterparties based on transaction history stored on DLT • Conducting clearing activities through the ledger can automate can enable investors to improve investment decisions processes, reduce settlement time and lower counterparty risk • Smart contracts enable the real-time reporting of asset history and • Smart contracts can simultaneously transfer equity and cash in real the enforcement of regulatory constraints time, reducing the likelihood of errors impacting settlement • Facilitating clearing and settlement processes via smart contracts • Disintermediating clearing, settlement and servicing processes can can eliminate need for intermediaries and reduce settlement time reduce costs and enable capital & liquidity management efficiencies Critical conditions for implementation Critical conditions for implementation • Tokenizing assets using a shared standard • Incorporating “net transaction” benefits within settlement • Fostering engagement among the financial ecosystem • Achieving multistakeholder alignment across participants • Architecting solution to manage over-the-counter (OTC) templates • Standardizing reference data utilized to match trades WORLD ECONOMIC FORUM | 2016 44

Section 5 Use Case Deep-Dive Modules WORLD ECONOMIC FORUM | 2016 45

Section 5.1 Payments: Global Payments WORLD ECONOMIC FORUM | 2016 46

Global Payments Introduction Current-state background A payment refers to the process of transferring value from one individual or organization to another in exchange for goods, services or the fulfillment of a legal obligation. Global payments are an expansion of that concept, in which payments can be completed across geographical borders through multiple fiat currencies. Key ecosystem stakeholders Overview Money Sender Money Transfer • Business is growing fast and steadily : The global payments volume is and Beneficiary Operator increasing at an approximate rate of 5% yearly worldwide and will reach 1 an estimated US$ 601 billion in 2016. Revenue is growing in all regions, Regulator especially in Asia where China will likely surpass Brazil as the third largest payment area after the United States and the Eurozone2, 3 • Profit margins are high: The average cost to the final customer (money Sender sender) is 7.68% of the amount transferred Bank • Newcomers are arriving: Non-bank transactions are reaching up to 10% of the total payments volume2 Local Clearing Network The focus of this use case is on low value−high volume payments from an SWIFT Beneficiary individual/business to an individual via banks or money transfer operators. Bank These transfers are more commonly known as remittances Correspondent Bank 1. Migration and Remittances Factbook 2016, World Bank, 2016. WORLD ECONOMIC FORUM | 2016 2. Top 10 Trends in Payments in 2016, Capgemini, 2016. 47 3. Global Payments 2015: A Healthy Industry Confronts Disruption, McKinsey & Company, 2015.

Global Payments Key market participants Market participant Role Description Money Sender and Core An individual or business wishing to transfer money (sender) to another individual Beneficiary or business (beneficiary) internationally Money TransferOperator Core Non-bank companies specialized in international money transfer through a global network of agents Sender Bank Core A sender’s preferred bank that offers international money transfer Beneficiary Bank Core A bank used by the beneficiary to receive funds Correspondent Bank Supporting A bank that has access to foreign exchange (FX) corridors and facilitates the transfer (via nostro accounts and SWIFT) SWIFT Supporting The global member-owned cooperative provider of secure financial messaging and settlement services Local Clearing Network Supporting The national interbank network that allow financial messaging/settlement (e.g. ACH, SPBand Zengin) Regulator Supporting Central banks and monetary authorities that determine and monitor adherence to KYC and AML standards WORLD ECONOMIC FORUM | 2016 48

Global Payments Current-state process depiction Initiate relationship Transfer money Deliver funds Actpost payment 2a Perform KYC Sender 2b SWIFT Beneficiary 4 All banks Periodic bank bank Perform KYC reports Process funds Track transfer Local clearing Local clearing Pay funds 6 Sender network network 5 Beneficiary 1 Money Money 3 Money transfer transfer transfer operator Correspondent operator operator bank Regulator Current-state process description 1 Senderneeds to send money to Thebank or money transfer 3 The beneficiary is notified and 6 Periodically, according to local another country and operator will move money across approaches a bank or money regulations, the bank and approaches a bank or money borders through either of the transfer operator money transfer operator will transfer operator, which does following mechanisms: 4 Depending on the pre-existing provide reports to regulators the following: - Utilizes SWIFT network (part of relationship, KYC may be containing transaction details 2a (e.g. sender and beneficiary ID, - Performs AML/KYC SWIFT network) performed by the bank or currencies, transferred amount activities - Facilitates transfer via money transfer operator 2b and timestamps) - Collects funds and fees correspondent banks (not part 5 The amount due in local - Confirms and supports of SWIFT network) currency is paid transfer inquiries/disputes * Transactions can either be “netted” or initiated per-transaction WORLD ECONOMIC FORUM | 2016 49

Global Payments Current-state pain points Initiate relationship Transfer money Deliver funds Actpost payment 3 7 Perform KYC Sender SWIFT Beneficiary 6 All banks Periodic bank bank Perform KYC reports Process funds Track transfer Local clearing Local clearing Pay funds Sender network network Beneficiary 1 2 Money Money Money transfer 4 5 transfer transfer operator Correspondent operator operator bank Regulator Current-state pain points 1 Inefficient onboarding: 3 Cost and delay: payments are 6 Vulnerable KYC: similar to #2, 7 Demanding regulatory information aboutthe sender costly and time consuming limited control exists over the compliance: due to various data and beneficiary is collected via depending on route veracity of information and sources and channels or manual and repetitive business 4 Error prone: information is supporting documentation, with origination, regulatory reports processes validated per bank/transaction, various maturity levels across can require costly technology 2 Vulnerable KYC: limited control resulting in high rejection rate institutions capabilities in addition to exists over the veracity of Liquidity requirement: banks complex business processes information and supporting 5 must hold funds in nostro (often supported by multiple documentation, with various accounts, resulting in operation teams) maturity levels across opportunity and hedging costs institutions WORLD ECONOMIC FORUM | 2016 50

Global Payments Future-state process depiction Initiate relationship Transfer money Deliver funds Actpost payment Sender ID Transfer amount 7 1 Beneficiary ID Date and time FX rate Payout conditions Distributed On-demand Verify KYC Sender Beneficiary bank Fiat currency Fiat currency bank Verify KYC ledger reports Transfer request Submit transfer 5 Pay funds Sender Smart contract 6 Beneficiary 2 3 Money 4 Real-time AML Money transfer transfer operator operator Regulator Regulator Future-state process description 1 Trust between the senderand a 4 The regulator can monitor 6 Funds are deposited 7 The transaction history is bank or money transfer transactions in real time and automatically to the beneficiary available on the ledger and can operator is established either receive specific AML alerts account via a smart contract or be continuously reviewed by via traditional KYC or a digital through a smart contract made available for pickup after regulators identity profile 5 A smart contract enables the verifying KYC 2 A smart contract encapsulates real-time transfer of funds with the obligation to transfer funds minimal fees and guaranteed between sender and beneficiary delivery without the need for 3 The currency conversion is correspondent bank(s) facilitated through liquidity providers on the ledger WORLD ECONOMIC FORUM | 2016 51

Global Payments Future-state benefits Initiate relationship Transfer money Deliver funds Actpost payment Sender ID Transfer amount 7 1 Beneficiary ID Date and time FX rate Payout conditions 6 Distributed On-demand Verify KYC Sender Beneficiary bank Fiat currency Fiat currency bank Verify KYC ledger reports Transfer request Submit transfer 4 5 Pay funds Sender Smart contract Beneficiary 2 Money 3 Real-time AML Money transfer transfer operator operator Regulator Regulator Future-state benefits 1 Seamless KYC: leveraging the 3 Real-time AML: regulators will 6 Seamless KYC: leveraging the 7 Automated compliance: the digital profile stored on DLT have access to transaction data digital profile stored on DLT regulator will have on-demand establishes trust and and can receive specific alerts establishes trust and access to the complete authenticates the sender based on predefined conditions authenticates the beneficiary transaction history over the 2 FXliquidity capabilities: 4 Reduced settlement time: ledger through smart contracts, cross-border payments can be foreign exchange can be completed in real time sourced from participants 5 Cost savings: with fewer willing to facilitate the participants, the improved cost conversion of fiat currencies structure can generate value WORLD ECONOMIC FORUM | 2016 52

Global Payments Critical conditions Ensuring compliance via standard Binding legality of cryptographic Adoptingstandards and KYC processes hash to exchange value ensuring interoperability Members of the ledger as well as regulators Regulators, central banks and legal participants Consensus on the choice of DLT platform across need to converge on common KYC processes to will need to collaborate from different a significant number of FIs will allow economies effectively identify stakeholders involved in the countries to reach a valid legal framework for of scale and higher return on investment transaction and ensure a corresponding global payments template data set is available on DLT Why? Why? Why? Real-time and on-demand AML/KYC If the underlying solution is not legally Different ledgers and/or adoption cycles from compliance for global payments is enabled accepted, legacy solutions will have to be key stakeholders would compromise benefits when banksand money transfer operators maintained in parallel, limiting the forecasted and lead to interoperability issues provide trusted and standard dataset on DLT benefits Challenge Challenge Challenge The policies and processes of banks and money Given no legal precedent, legal and technology The differing priorities, levels of urgency and transfer operatorsto onboard customers subject matter experts from different countries budgets of players will created obstacles to (sender, beneficiary) are diverse, as are the will need to establish a globally accepted legal forminginternational agreements among regional regulatory requirements framework participants Critical condition categories WORLD ECONOMIC FORUM | 2016 Stakeholder Technology Regulatory Governance 53 alignment

Global Payments Additional considerations DLT enabled by global banks Embedded solution Cryptocurrencyas the linking currency Overview Overview Overview Global correspondent banks can implement The adoption of DLT may be driven by key Banks can leverage cryptocurrency on the DLT DLT to unlock benefits and increase efficiency informationtechnology providers; as they to facilitate global payments, eliminating in the value chain, while also enabling next- integrate DLT into their core banking platforms, supporting settlement platforms and foreign generation competitive services to local banks they might play a key role on setting standards currency buffers in nostro accounts Impact Impact Impact • Non-members of the DLT platform would • Banks and informationtechnology • Additional gains will be made on liquidity still be reliant on middlemen and their providers will need to collaborate on a management and transaction settlement associated fees to offer global payments as shared strategy to converge on mutual time a product interest • The use of cryptocurrency will add to • The use of DLT may be driven by the choice additional volatility and will demand of ledger implemented by the information additional hedging instruments technology provider • Banks would be required to hold cryptocurrency as assets on their books WORLD ECONOMIC FORUM | 2016 54

Global Payments Conclusion Summary Outlook • Real-time settlement: enabling banks can fulfil and settle • SWIFT is implementing a “Global Payments Innovation international money transfers in real time, while increasing Initiative” to facilitate global payments with transparent fees profitability via a reduction in liquidity and operations costs and same-day funds delivery but this initiative does not employ • Reduced fraud: transparentand immutable data on DLT can DLT reduce fraudulent transactions to a fraction of what they are • Currently, the adoption of DLT for global payments by today incumbent banks is limited, although concrete initiatives are • Development of digital obligations: smart contracts can be occurring in North America and Europe across retail and used to capture obligations among FIs in order to ensure that wholesale banking appropriate funds are exchanged, eliminating operational • Opportunities exist for regulators to assess and promote the errors viability of prototypes and future implementations within current regulatory frameworks Key takeaways Unanswered questions • Challenge correspondent banks: DLT has the potential to • Initiatives: Will retail and wholesale banking initiatives merge disrupt the role of dedicated banks that act as gateways to towards common DLT implementation despite competing international fund transfers interests? • Allow direct interaction between sender and beneficiary • Volatility: Is there a role for cryptocurrencies as a bridge asset banks: DLT can give direct access to most if not all relevant to facilitate FX? destinations for adopting banks and money transfer operators • SWIFT: What role will SWIFT play in enabling DLT-based global • Enable micropayments: DLT can make low-value transactions payments? more feasible to FIs as cost structures are modified WORLD ECONOMIC FORUM | 2016 55

Section 5.2 Insurance: P&C Claims Processing WORLD ECONOMIC FORUM | 2016 56

P&C Claims Processing Introduction Current-state background Insurance is a financial risk management product in which an individual or entity receives protection against losses (e.g. property, asset, casualty and health) from the insurer. Commercial property and casualty (P&C) insurance (e.g. commercial motor, commercial property and commercial liability) protects businesses against risks that may result in loss of life or property. Key ecosystem stakeholders Overview Insuree • P&C is large: P&C is the second largest segment of insurance worldwide (after life and health) with earned premiums in 2014 of US$ 728.6 billion, Insurer growing at 5.1% since 2010, and is set to reach US$ 895.1 billion by 20181 • Claims processing is a key bottleneck: For P&C insurance, the tasks associated with claim and loss processing are a major source of friction, accounting for an average of 11% of the overall written premium (revenue)2 Reinsurer Supporting Data Sources Regulator DLT has the potential to optimize the back-office operational costs of property and casualty insurers. This use case highlights the key opportunities in claims Broker processing for the P&C commercial insurance business 1. Global Commercial Non-Life Insurance: Size, Segmentation WORLD ECONOMIC FORUM | 2016 and Forecast for the Worldwide Market, Finaccord, 2015. 57 2. ISO Verisk Analytics, 2016.

P&C Claims Processing Key market participants Market participant Role Description Insuree Core Companies looking for insurance to cover their underlying operational risks (properties and casualties) Insurer Core A company that, through a contractual agreement, undertakes to compensate specified losses, liability or damages incurred by another company Reinsurer Core A company that provides financial protection to insurance companies handling risks that are too large for insurance companies to handle on their own Regulator Supporting Insurance supervisory agency and central banks that determine and monitor adherence to KYC, AML, risk concentration, liquidity and solvency standards Broker Supporting A specialized company or registered professional that acts as an intermediary, advising and connecting insurees with insurers Diversified sources of information used by insurers to assess underwriting risks Supporting Data Sources Supporting and evaluate claims and losses; they can include authorities, experts and official data sources, among others (e.g. police report, weather database, official inspection reports, asset ownership records) WORLD ECONOMIC FORUM | 2016 58

P&C Claims Processing Current-state process depiction Claim submission Loss assessment Claim approval 1 Report loss 2 Request additional Claim approved information Provide requested 5 6 Provide 7 Insuree information Broker Insurer Loss adjuster Claims agent additional Loss adjuster Claims agent information 3 Submit claim Asset Weather Credit Inspection Authority Initiate 8 database statistics reports provider report payment Broker Insuree 4 6 Confirm 5 Request additional Insurer Reinsurer submission Reinsurer Loss adjuster Claims agent information Insuree Current-state process description 1 Insuree reports loss and claims 4 After verifying the documentation received, the insurer(s) confirm 7 After concluding claim restitution from an insurer (and receipt of the claim submission assessments, the loss adjuster reinsurer, if applicable) via a 5 Loss adjusters perform claim assessments and verify the validity of the within each insurer reaches a broker (or independently) claims through client information, secondary data sources (e.g. conclusion about the claim 2 Broker may request additional weatherstatistics and authority reports) or additional inspection 8 If the claim is approved, information from insuree to assessments/interviews payment to the insuree is support the loss claim 6 If additional information is required by the insurer, a new information initiated via an insurer’s claims 3 Broker submits the claim to the request is made to the broker or insuree. In some situations, the agent insurer and reinsurer (in cases insuree must collect supporting documentation directly from of syndicate insurance or secondary data sources reinsurance) WORLD ECONOMIC FORUM | 2016 59

P&C Claims Processing Current-state pain points Claim submission Loss assessment Claim approval 1 Report loss 2 Request additional Claim approved information Provide requested 4 Provide 5 Insuree information Broker Insurer Loss adjuster Claims agent 3 additional Loss adjuster Claims agent information Submit claim Asset Weather Credit Inspection Authority Initiate database statistics reports provider report payment Broker Insuree 4 Confirm 4 Request additional Insurer Reinsurer submission Reinsurer Loss adjuster Claims agent information Insuree Current-state pain points 1 Undesirable customer 3 Fragmented data sources: insurers must establish individual 5 Manual claimprocessing: loss experience: to initiate a claim, relationships with third-party data providers to get manual access to adjusters are required to review the insuree must complete a supporting asset, risk and loss data that may not be updated claims and to: complex questionnaire and 4 Fraud prone: theloss assessment is completed on a per-insurer and - Ensure their completeness maintain physical receipts of per-loss basis with no information sharing between insurers, - Request additional the costs incurred by the loss increasing the potential for fraud and manual rework information or use Costly intermediaries: brokers supporting data sources 2 act as intermediaries during - Validate loss coverage processing, adding delays and - Identify the scope of the costs to the submission liability - Calculatethe loss amount WORLD ECONOMIC FORUM | 2016 60

P&C Claims Processing Future-state process depiction Claim submission Loss assessment Claim approval 1 4 Request loss Claim approved Submit claim confirmation data Asset Weather Credit Inspection Authority database statistics reports provider report 7 Insuree Confirm coverage Request manual review Loss adjuster Smart contract or 2 3 5 6 Initiate Smart payment contract Smart Insuree information Coverage period Covered asset information Claim history Insurer Loss adjuster Reinsurer Loss adjuster Insuree asset Coverage terms Loss submission details Future-state process description 1 Loss information is submitted 3 Claim due diligence is automated via codified business rules within the 7 If the claim is approved, by the insuree or smart asset smart contract, using information submitted by the insuree payment to the insuree is (via sensors or external data 4 DLT automatically utilizes secondary data sources to assess the claim initiated via a smart contract sources if the asset is and calculate the loss amount technologically capable), 5 Depending on the insurance policy, a smart contract can automate the triggering an automated claim liability calculation for each carrier where a syndicate (or insurers or 2 application reinsurers) exists For insurance policies issued via 6 In predetermined situations, the smart contract can trigger an a smart contract, insurees additional assessment of the claim in order to reach a final receive feedback regarding decision/calculation initial coverage in real time WORLD ECONOMIC FORUM | 2016 61

P&C Claims Processing Future-state benefits Claim submission Loss assessment Claim approval 1 5 Request loss Claim approved Submit claim confirmation data Asset Weather Credit Inspection Authority database statistics reports provider report 6 Insuree Confirm coverage Request manual review Loss adjuster Smart contract or 2 3 4 Initiate Smart payment contract Smart Insuree information Coverage period Covered asset information Claim history Insurer Loss adjuster Reinsurer Loss adjuster Insuree asset Coverage terms Loss submission details Future-state benefits 1 Simplified and/or automated 2 Enhanced customer experience: through the streamlined transfer of 5 Integrateddata sources: DLT claim submission: through a loss information from insuree to insurer, DLT eliminates the need for facilitates the integration of smart contract, the claim brokers and reduces claim processing times various data sources from submission process will be 3 Automated claim processing: business rules encoded in a smart trusted providers with minimal simplified and/or fully contract eliminate the need for loss adjustors to review every claim required manual review automated (in cases of smart (functionality will enable the loss adjuster to review the claim and Streamlined payment process: assets) provide a decision, in specific risk situations) 6 in most cases, the smart 4 Reduction in fraudulent claims: the insurer will seamlessly have contract will facilitate the access to historical claims and asset provenance, enabling better payment automatically without identification of suspicious behaviour effort from the back office WORLD ECONOMIC FORUM | 2016 62

P&C Claims Processing Critical conditions Building a comprehensive set of Adoptingstandards for relevant Providing a legal and regulatory asset profiles and history claims data framework Asset records must migrate to the DLT to allow Insurers and regulators will play a key role in Regulators, insurers and other relevant smart contracts to consume reliable and setting data standards and facilitating the stakeholders will have to establish a legal updated asset information directly over the adoption by external data providers to ensure framework that regulates the validity of smart ledger in the case of a claim the effective flow of information among the contracts as binding instruments for insurance participants policies Why? Why? Why? If asset provenance and loss information are If the data is not standardized, additional The absence of a legal precedent will expose kept off the ledger among different players, manual work will still be required, resulting in the insurer and insuree to higher counterparty smart contracts will lose their effectiveness to cost inefficiencies and jeopardizing gains risk and disputes process claims automatically Challenge Challenge Challenge Engaging the market and enforcing a specific Changing current company-specific processes Careful and close collaboration would be DLT as the dominant mechanism for asset and data sets to a shared standard will require required since stakeholders will likely have registry may be challenging to implement and extensive discussion and converging interests competing interests and senses of urgency to will require stakeholders diligence establish a shared framework Critical condition categories WORLD ECONOMIC FORUM | 2016 Stakeholder Technology Regulatory Governance 63 alignment

P&C Claims Processing Conclusion Summary Outlook • Claims automation:Claims processing can be automated using • The application of DLT within insurance is currently in its trusted third-party data sources and the codification of infancy, with a number of incumbents and new entrants business rules in smart contracts on the ledger providing early proof of concept, focusing on: • Reduced fraud:Transparentand immutable data on the ledger - Creation of immutable insurance claim records can also reduce fraudulent claims to a fraction of what they are - Development of asset provenance to assist in risk today profiling and claims processing - P2P insurance • Opportunities exist for regulators/FIs to: - Monitor and assess new DLT-based products (e.g. P2P insurance) - Guide the industry towards a lower-cost model via the common and shared implementation ofDLT Key takeaways Unanswered questions • Smart contracts will be key: Insurance policies can • Profitability: Will the automated processing of claims have bemanagedusingsmartcontracts on DLT, capturing coverage adverse effects on loss ratios? conditions, and syndicate insurance agreements or insurer- • Pricing: What impact will changes in loss ratios have on reinsurer agreements insurance premiums? • Loss adjustment expensesmay become irrelevant:DLT utilization will fundamentally disrupt the cost and profitability ratios that are currently in use across the insurance industry WORLD ECONOMIC FORUM | 2016 64

Section 5.3 Deposits and Lending: Syndicated Loans WORLD ECONOMIC FORUM | 2016 65

Syndicated Loans Introduction Current-state background Syndicated loans provide clients with the ability to secure large-scale diversified financing at the current market rate. These loans are funded by a group of investors (e.g. syndicate), where one investor serves as the lead arranger. The lead arranger serves as the underwriter for the loan and performs all administrative tasks throughout the loan life cycle, charging a fee based on the complexity and risk factors associated with the loan. Key ecosystem stakeholders Overview • The US market is dominated by incumbents: Four US FIs accounted for Regulator Lead Arranger more than 50% of the market share (US$ 1,917 billion total volume) in 1 2014 • The EMEA market is large: The total EMEA syndicated loan volume in 1 2014 amounted to US$ 1,214.5 billion • The Asia-Pacific market is growing: The Asia-Pacific (ex-Japan) syndicated loan volume increased by 22% in 2014, bringing total volume to US$ 524.2 billion1 • The Latin American market is immature: The total Latin American 1 syndicated loan volume in 2014 amounted to US$ 42.2 billion Requesting Syndicate DLT has the potential to optimize syndicated loan back-office operations. This Entity use case highlights key opportunities in the end-to-end syndicated loan process 1. Global Syndicated Loans: League Tables 2014, Bloomberg, 2014. WORLD ECONOMIC FORUM | 2016 66

Syndicated Loans Key market participants Market participant Role Description Lead Arranger Core An FI that leads a group of investors through the underwriting and financing of a large loan Syndicate Core A group of investors formed into one entity for the purpose of distributing risk across institutions for large transactions RequestingEntity Core An organization requesting a large loan from an FI Regulator Supporting A monitor that verifies adherence to AML compliance activities WORLD ECONOMIC FORUM | 2016 67

Syndicated Loans Current-state process depiction Syndication Diligence Underwriting Closing and servicing Loan request Loan funded 1 2 Principal & interest Corporation Lead arranger Lead arranger Lead arranger Corporation 30% pledged Lead arranger solicits 3 Lead 6 Syndication fee syndicate members arranger Corporation Principal and interest payments Syndicate 4 5 Syndicate Syndicate Member 1 Member 2 Member 3 Member 1 Member 2 Member 3 25% pledged 20% pledged 25% pledged Member 1 Member 2 Member 3 Current-state process description 1 A corporation requests a loan 4 The lead arranger facilitates the 5 Syndicate memberspledge a 6 The lead arranger takes on the from an FI (referred to as the investigationof the percentage of the overall risk administrative responsibility for lead arranger withinthe corporation’s financial health to based on their respective servicing throughout the agreed syndicated loan market) determine credit worthiness tolerance levels upon contract life cycle (e.g. The lead arranger performs KYC and the level of risk associated funding the loan and dispersing 2 procedures in accordance with with the loan principal and interest payments regulatory requirements to syndicate members) To reduce risk, the lead 3 arranger sources prospective members to fund the loan WORLD ECONOMIC FORUM | 2016 68

Syndicated Loans Current-state pain points Syndication Diligence Underwriting Closing and servicing Loan request 6 Loan funded 5 Principal & interest Lead arranger 7 Corporation Lead arranger 30% pledged Lead arranger Corporation Lead arranger solicits 1 Lead 8 10 Syndication fee syndicate members arranger Corporation 9 Principal and interest payments Syndicate 2 4 Syndicate Syndicate 3 Member 1 Member 2 Member 3 Member 1 Member 2 Member 3 Member 1 Member 2 Member 3 25% pledged 20% pledged 25% pledged Current-state pain points 1 Time-intensive process: 3 Lack of technology integration: 5 Lack of technology integration: 8 Delayed settlement time: while selecting syndicate members due diligence team members underwriting systems do not verifying funds, payments settle based on financial health and reference various applications communicate with diligence t+3 (trade date plus three days), industry expertise is time- and data sources, resulting in systems, duplicating efforts delaying investors from intensive and inefficient due to additional time required and a 6 Inefficient fund disbursal: the 9 obtaining funds manual review processes potential for errors lead arranger facilitates Costly intermediaries: third- 2 Time-intensive review: 4 Labour-intensive process: the principal and interest disbursal, party organizations facilitate analysing a corporation’s documentation of syndicate resulting in additional costs to servicing operations, resulting in financial information is time- member pledging is labour- 7 investors 10 additional costs to investors intensive and inefficient due to intensive and inefficient due to Default risk: the lead arranger Siloed systems: activities are manual review processes reliance on manual activities poses a risk in the disbursement duplicative since systems do not of funds throughout the loan communicate with one another life cycle WORLD ECONOMIC FORUM | 2016 69

Syndicated Loans Future-state process depiction Syndication Diligence and underwriting Closing and servicing 1 Syndicate Diligence results Loan funded 6 7 tes Investor records 4 Principal & interest uq Risk tolerance 5 re Corporation Smart contract Lead arranger Corporation Smart contract Regulator ano 2 3 Member 1 30% pledged L Assets Loan funding Servicing documents Liabilities Syndication fee payment dispersion Lead arranger Smart contract Project Plan Principal and interest payments Member 2 Members selected Member 1 Member 2 Member 3 Lead arranger Member 1 Member 2 Member 3 Regulator based on criteria Member 3 25% pledged 20% pledged 25% pledged Future-state process description 1 A corporation requests a loan from an FI 4 Leveraging the corporation’s financial 6 Smart contracts eliminate the need for a acting as the lead arranger information and project plan data accessible third party to fund the loan, disperse funds through the DLT, diligence activities are and facilitate the loan servicing process 2 Leveraging the corporation’s digital identity, automated via a smart contract the lead arranger performs KYC activities in 7 Embedded regulation facilitates the review real time through the DLT’s record-keeping 5 Key attributes from the diligence process are of financial details to ensure AML functionality, which also provides regulators populated into the underwriting template, procedures are followed appropriately with a transparent view of activity streamlining the process and reducing time through the DLT’s transfer of value capability 3 The investor’s financial records and risk tolerance stored on DLT automates the selection process, reducing the time it takes to form a syndicate WORLD ECONOMIC FORUM | 2016 70

Syndicated Loans Future-state benefits Syndication Diligence and underwriting Closing and servicing Syndicate Diligence results 5 Loan funded 6 7 tes Investor records 3 Principal & interest uq Risk tolerance 4 re Corporation Smart contract Lead arranger Corporation Smart contract Regulator ano 1 Member 1 30% pledged L Assets Loan funding Servicing documents Liabilities Syndication fee payment dispersion Lead arranger Smart contract Project Plan Principal and interest payments Member 2 2 Members selected Member 1 Member 2 Member 3 Lead arranger Member 1 Member 2 Member 3 Regulator based on criteria Member 3 25% pledged 20% pledged 25% pledged Future-state benefits 1 Automated syndicate formation: through 3 Automated diligence and underwriting: 5 Reduced closing time: loan funding is programmable selection criteria within a corporation financial information analysis facilitated in real time, eliminating smart contract, syndicate formation is and risk underwriting are automated, traditional t+3 settlement and centralized automated, reducing the time for a reducing the execution time and the amount lead arranger operations corporation’s loan to be funded of resources required to perform these 6 Servicing disintermediation: activities are 2 Embedded regulator: throughout the 4 activities executed via smart contracts, eliminating the syndicated loan life cycle, regulators are Technology integration: diligence systems need for third-party intermediaries provided with a real-time view of financial communicate pertinent financial information 7 Reducedcounterparty risk: the details to facilitate AML/KYC activities to underwriting systems, streamlining disbursement of principal and interest process execution and reducing underwriting payments throughout the loan life cycle is time automated, reducing operational risk WORLD ECONOMIC FORUM | 2016 71

Syndicated Loans Critical conditions Building risk rating framework for Standardizing diligence and Providing access to financial syndicate selection underwriting templates details on the distributed ledger FIs must develop a framework that provides FIs must standardize financial attributes to FIs and loan requestors must be willing to store guidance for rating and sharing counterparty facilitate the automated population of diligence pertinent financial information on the performance information on the distributed and underwriting templates distributed ledger ledger Why? Why? Why? Automated syndicate formation relies on a The automated population of diligence and To facilitate automated syndicate formation, robust counterparty rating system that lead underwriting templates requires standardized due diligence review and underwriting arrangers can leverage for syndicate member data fields to move information from one template creation, pertinent financial details selection system to another must be accessible through the distributed ledger Challenge Challenge Challenge Aligning FIs around a single standard for The myriad diligence and underwriting Given no legal precedent or liability model is counterparty rating requires an enormous collection vehicles across FIs will make established to mitigate the risk of storing amount of coordination and governance alignment around one format difficult proprietary financial information on the ledger, participation is uncertain Critical condition categories WORLD ECONOMIC FORUM | 2016 Stakeholder Technology Regulatory Governance 72 alignment

Syndicated Loans Conclusion Summary Outlook • Underwriting automation: Underwriting activities can be • Applications of DLT within syndicated loans are currently being automated, leveraging financial details stored on the explored at the proof-of-concept level with a number of distributed ledger incumbents, focusing on: • Regulatory transparency:Compliance officials are provided - Smart contract settlement and servicing real-time tools to enforce KYC requirements - Automated underwriting • Cost savings: DLT can provide a globalcost reduction • Opportunities exist for FIs to reduce closing-time operational opportunitywithin the process execution and settlement risk and manual activities: subprocesses of syndicated loans - Loan funding executed via smart contract - Account servicing facilitated via smart contract - Automated underwriting activities Key takeaways Unanswered questions • Manage loan life cycle via smart contracts: Syndicated loans • Automated AML activities: What are the implications of can be managedusingsmartcontracts on DLT – KYC making KYC information more public? Is this a key step to verification, due diligence review, underwriting automation, mutualizing KYC information among FIs? loan funding, payment dissemination, etc. – as the loan moves through the syndicated loan life cycle • Execute servicing disintermediation:Traditionally performed by a third party, closing and servicing activities are executed via smart contract, eliminating third-party fees WORLD ECONOMIC FORUM | 2016 73

Section 5.4 Deposits and Lending: Trade Finance WORLD ECONOMIC FORUM | 2016 74

Trade Finance Introduction Current-state background Trade finance is the process by which importers and exporters mitigate trade risk through the use of trusted intermediaries. FIs serve as the trusted intermediary providing assurance to sellers (in the event the buyer doesn't pay) and contract certainty to buyers (in the event that goods are not received). Regardless of counterparty performance, payment and delivery terms (e.g. prepayment, piecemeal or upon delivery) are documented in a letter of credit or open account contract vehicle. FIs command a fee for documentation/oversight of payment terms and for taking on the risk position of either the importer or exporter. Key ecosystem stakeholders Overview Importer • Financing dominates world trade: Today’s trade operations are facilitated through financing. US$ 18 trillion of annual trade transactions involve some form of finance (credit, insurance or guarantee)1 Correspondent Import • The trade finance market is large: Since financing has become such an Banks Bank integral part of trading, the market has grown substantially to more than US$ 10 trillion annually1 Customs Exporter Freight Export Bank DLT has the potential to optimize the regulatory and operations costs of trade Inspection Company finance. This use case highlights the key opportunities in the end-to-end trade finance process 1. Improving the Availability of Trade Finance in Developing WORLD ECONOMIC FORUM | 2016 Countries: An Assessment of Remaining Gaps, World Trade Organization, 2015. 75

Trade Finance Key market participants Market participant Role Description Importer Core An entity requesting a cross-border product/service Import Bank Core An FI that assumes risk on behalf of the importer Exporter Core An entity providing the cross-border product/service Export Bank Core AnFI thatassumes risk on behalf of the exporter Inspection Company Supporting A company thatverifies that the goods shipped match those on the invoice Freight Supporting The transport of goods by truck, train, ship or aircraft Customs Supporting The country authority responsible for controlling the flow of goods Correspondent Banks Supporting An FI that provides services on behalf of import/export banks WORLD ECONOMIC FORUM | 2016 76

Trade Finance Current-state process depiction Establish payment terms Deliver goods Settle on terms 1 Order goods Initiate Receipt shipment 6 9 notification Provide invoice Importer Exporter Exporter Inspection Importer Import bank Financial company 2 agreement ials Verified Product 10 Initiate can goods Verified Product payment nFi 7 goods shipped 4 5 8 3 Financials Financials Payment Customs Freight Customs Import bank Correspondent bank Export bank Country A Country B Correspondent bank Export bank Current-state process description 1 An importer and exporter agree to the sale of a 5 The export bank provides the exporter with the 9 Following inspection, the goods product at a future date and time financing details, which enables the exporter to are delivered to the importer, 2 The financial agreement is captured within an initiate the shipment which provides a receipt invoice, which identifies the quantity of goods sold, 6 A trusted third-party organization inspects the notification to the import bank price and delivery timeline goods for alignment with the invoice 10 Upon receiving notification, the 3 The importer provides a bank with a copy of the 7 Local customs agents within the export country import bank initiates the financial agreement for review inspect the goods based on the country code payment to the export bank 4 The import bank reviewsthe financial agreement 8 The goods are transported by freight from Country through the correspondent and provides financials on behalf of the importer to Ato Country B and local customs agents within the bank a correspondent bank, which has established a import country inspect the goods based on the relationship with the export bank country code WORLD ECONOMIC FORUM | 2016 77

Trade Finance Current-state pain points Establish payment terms Deliver goods Settle on terms Order goods Initiate Receipt Provide invoice shipment notification Importer 1 2 Exporter Exporter Inspection Importer Import bank Financial company agreement ials Verified Product 7 Initiate can goods Verified Product payment 3 4 Fin goods shipped 8 Financials Financials 5 6 Payment Customs Freight Customs Import bank Correspondent bank Export bank Country A Country B Correspondent bank Export bank Current-state pain points 1 Manual contract creation: the import bank 4 Manual AML review: the export bank must 7 Multiple versions of the truth: manuallyreviews the financial agreement provided manually conduct AML checks using the financials as financials are sent from one by the importer and sends financials to the provided by the import bank entity to another, significant correspondent bank 5 Multiple platforms: since each party across version control challenges exist 2 Invoice factoring: exporters use invoices to achieve countries operates on different platforms, as changes are made short-term financing from multiple banks, adding miscommunication is common and the propensity 8 Delayed payment: multiple additional risk in the event the delivery of goods for fraud is high intermediaries must verify that fails 6 Duplicative bills of lading: bills of lading are funds have been delivered to 3 Delayed timeline: theshipment of goods is financed multiple times due to the inability of the importer as agreed prior to delayed due to multiple checks by intermediaries banks to verify their authenticity the disbursement of funds to and numerous communication points the exporting bank WORLD ECONOMIC FORUM | 2016 78

Trade Finance Future-state process depiction Establish payment terms Deliver goods Settle on terms Order goods Initiate Verified Verified Product Receive Provide invoice shipment goods goods shipped goods 1 4 5 6 Importer Exporter Exporter Inspection Customs Freight Customs Importer Import bank Smart Smart company Country A Country B Smart contract contract contract 7 Initiate payment Financial 3 2 agreement + + + Shipment Letter of Shipment Smart Payment Import bank Export bank initiated credit received contract complete Export bank Future-state process description 1 Following the sale agreement, 3 The export bank reviews the letter of credit; once approved a smart 7 Theimporter digitally the financial agreement is contractis generated to cover the terms and conditions of the letter acknowledges receipt of the shared with the import bank of credit goods,which initiates payment through a smart contract 4 The exporter digitally signs the letter of credit within the smart from the import bank to the 2 The import bank reviews the contract to initiate shipment export bank via a smart contract arrangement, drafts the terms 5 Goods are inspected by a third-party organization and the customs of the letter of credit and agent in the country of origin (all requiring a digital signature for submits it to the export bank for approval) approval 6 The goods are transported by freight from Country A toCountry B and inspected by local customs agents prior to being received by the importer WORLD ECONOMIC FORUM | 2016 79

Trade Finance Future-state benefits Establish payment terms Deliver goods Settle on terms Order goods Initiate Verified Verified Product Receive Provide invoice 2 shipment goods goods shipped goods 6 Importer Exporter Exporter Inspection Customs Freight Customs Importer Import bank Smart Smart company Country A 4 Country B Smart contract contract contract 7 Initiate 5 payment Financial 3 8 1 agreement + + + Shipment Letter of Shipment Smart Payment Import bank Export bank initiated credit received contract complete Export bank Future-state benefits 1 Real-time review: financial 3 Disintermediation: banks facilitating trade finance through DLT do not 7 Automated settlement and documents linked and require a trusted intermediary to assume risk, eliminating the need for reduced transaction fees: accessible through DLT are correspondent banks contract terms executed via reviewed and approved in real 4 Reduced counterparty risk: bills of lading are tracked through DLT, smart contract eliminate the time, reducing the time it takes eliminating the potential for double spending need for correspondent banks to initiate shipment 5 Decentralized contract execution: as contract terms are met, status is and additional transaction fees 2 Transparent factoring: invoices updated on DLT in real time, reducing the time and headcount 8 Regulatory transparency: accessed on DLT provide a real- required to monitor the delivery of goods regulators are provided with a time and transparent view into 6 Proof of ownership: the title available within DLT provides real-time view of essential subsequent short-term transparency into the location and ownership of the goods documents to assist in financing enforcement and AML activities WORLD ECONOMIC FORUM | 2016 80

Trade Finance Critical conditions Providing transparency into trade Enabling interoperability with Rewriting regulatory guidance finance agreements legacy platforms and legal frameworks Bills of lading and invoice details must be To ensure smart contracts containing the Agreed upon procedures must be established transparent within the smart contract to reduce details of the financing agreement flow within the end-to-end trade finance process to counterparty risk through the trade finance process, FIs and provide regulators with a real-time view of bills technology providers must ensure the ledger is of lading, letters of credit, etc. interoperable with many different platforms Why? Why? Why? Ecosystem participants must have a The creation of letters of credit/bills of lading Compliance officials must have a real-time transparent view into invoice and bills of lading and goods inspection documentation requires view of financing details within the smart details to ensure factoring and double stakeholders to integrate the developed DLT contract to enforce regulatory guidelines spending are not taking place solution with legacy systems Challenge Challenge Challenge FIs and shipment carriers must establish FIs, customs, freight, importers and exporters Given the lack of legal/regulatory precedent, procedures and liability models that govern the utilize multiple technology solutions that may the procedures that facilitate the use of smart transparent sharing of financial information be incapable of interfacing with the ledger contract reporting to regulatory agencies will be difficult to establish Critical condition categories WORLD ECONOMIC FORUM | 2016 Stakeholder Technology Regulatory Governance 81 alignment

Trade Finance Conclusion Summary Outlook • Letter of credit automation: Letter of credit creation can be • The application of DLT within trade finance is currently being automated leveraging financial details stored on the distributed explored at the proof-of-concept level with a number of ledger incumbents, focusing on: • Regulatory transparency:Compliance officials are provided - Letters of credit encapsulated in a smart contract real-time tools to enforce AML and customs activities - Electronic invoice ledger • New product opportunities: DLT within global trade networks • Opportunities exist for FIs to reduce counterparty risk and fraud will yield new product opportunities for incumbents (or by: innovators) around lending and securitization of trade - Providing transparent invoice factoring obligations - Reducing bill of lading double spending via transparent tracking • Cost savings: DLT can yield cost savings associated with letter of credit creation, process automation and fraud reduction Key takeaways Unanswered questions • Manage letters of credit via smart contracts: Letters of credit • Pricing: What is the impact on financing fees (taking into can be managedusingsmartcontracts on DLT – capturing account the cost of implementation) as correspondent banks shipment details, financial information and payment data as the are eliminated from the trade finance process? letter of credit moves through the trade finance process • Level of disruption: how will the import banks and export • Consider correspondent banking disruption:DLT utilization can banks ensure that they are not disrupted by new or existing fundamentally disrupt the role of correspondent banks as FIs market participants? work directly with one another WORLD ECONOMIC FORUM | 2016 82

Section 5.5 Capital Raising: Contingent Convertible (“CoCo”) Bonds WORLD ECONOMIC FORUM | 2016 83

Contingent Convertible (“CoCo”) Bonds Introduction Current-state background Contingent convertible (“CoCo”) bonds are financial instruments that enable banks to increase their capital ratio in case it falls below a predefined threshold. Unlike traditional bonds, "CoCo" bonds provide banks with the ability to convert the bond into equity if a capital ratio condition is met (e.g. bank capital falls below 7.5%) or a discretionary circumstance is determined by the bank/regulators. Today’s banks are responsible for calculating their own capital ratio, and regulators do not have insight unless they request a stress test. Key ecosystem stakeholders Overview • "CoCo" bond issuance has flatlined: After experiencing continued Financial Institution double-digit market growth since 2013, issuance flatlined in European markets in 2015 • A primary concern has been uncertainty: After being developed as a mechanism to reduce the need for bailouts during financial crises, no "CoCo" bonds have required conversion to equity, making the market Regulator largely untested so far • Another key concern is the extreme volatility of these instruments: While yields have been historically high, recent events have had significant impact. High market volatility, fuelled by regulator stress tests in 2016, eliminated all yields within six weeks Investor DLT has the potential to embed regulation into business processes. This use case highlights key opportunities to reduce volatility and uncertainty regarding this instrument and potentially to increase "CoCo" bond issuance in the future WORLD ECONOMIC FORUM | 2016 84

Contingent Convertible (“CoCo”) Bonds Key market participants Market participant Role Description Financial Institution Core The institution that issues "CoCo" bonds and solicits investment from investors Investor Core The individual and/or institution that agrees to the terms outlined during bond issuance and invests in the asset Regulator Supporting The entity that ensures market stability; FIs adhere to their predefined loan absorption mechanism criteria WORLD ECONOMIC FORUM | 2016 85

Contingent Convertible ("CoCo") Bonds Current-state process depiction Issuance Monitoring (ongoing and ad hoc) Loan absorption Bond request Equity g 3 2 oin Market Yes “CoCo” bond Bank Investors g Liabilities and 6 2 On Bank Assets Regulator Bank Investors Trigger options Trigger options Capital ratio book-value Below Capital ratio book-value calculation calculation c 4 Stress test condition?  Capital ratio market-value ho Capital ratio market-value calculation Ad 5 calculation Discretionary Regulator Bank Discretionary Current-state process description 1 To initiate issuance, the bank 2 After determining bond attributes (e.g. trigger and maturity date), the 4 If any monitoringmechanism determines a trigger option bank issues “CoCo” bonds to raise funds from a broad set of investors results in requiring loan through a book-value or (including retail, banks, hedge funds and insurance companies) absorption to be activated (e.g. market-value calculation(e.g. 3 The issuing bank and regulator monitor the trigger to determine if bank capital falls below 7.5% or bank capital falls below 7.5%) to loan absorption needs to be activated through two ongoing and one discretionary action is taken), activate loan absorption ad hoc mechanisms: the “CoCo” bond is converted (conversion of a “CoCo” bond to - Bank analyses trigger (no frequency mandated by regulator) into equity at a predetermined equity) a conversion rate - Bank and regulator make discretionary decision (e.g. market b performance) - Regulator requests point-in-time stress test to assess capital ratio c WORLD ECONOMIC FORUM | 2016 86

Contingent Convertible ("CoCo") Bonds Current-state pain points Issuance Monitoring (ongoing and ad hoc) Loan absorption Bond request Equity g 3 2 oin Market Yes “CoCo” bond Bank Investors g Liabilities and 6 2 On Bank Assets Regulator Bank Investors Trigger options Trigger options Capital ratio book-value Below Capital ratio book-value calculation calculation c 4 Stress test condition?  Capital ratio market-value ho Capital ratio market-value calculation Ad 5 calculation Discretionary Regulator Bank Discretionary Current-state pain points 1 Limited participation: limited 2 Inconsistent trigger calculation methods: banks can complete capital 6 Delayed activation time: since rating information within the ratio analyses through book-value (using internal models) or market- trigger conditioncalculation “CoCo” bonds market limits value (comparing stock market capitalization to assets) calculations frequency is not regulated (e.g. participationfrom large 3 Ambiguity: regulators lack insight into capital ratio (aside from bank capital ratios may be institutional investors requesting point-in-time stress tests) and whether loan absorption calculated quarterly), “CoCo” may need to be activated in the future bonds may not be converted 4 Lack of real-time reporting: regulators must rely on public-facing, into equity immediately after point-in-time stress tests to assess the health of the banks and “CoCo” the condition is met bonds market 5 Market fear: bank equities are susceptible to extreme volatility as investors fear stress test results WORLD ECONOMIC FORUM | 2016 87

Contingent Convertible (“CoCo”) Bonds Future-state process depiction Issuance Monitoring (ongoing) Loan absorption Bond Select based Market Equity request on criteria Liabilities Smart 1 2 Assets contract Bank Bank “CoCo” 8 Bank Investors 4 rt Bank bond Smart Investors “CoCo” bond Capital ratio: 7.49% Yes Ale6 7 contract Coupon rate 3 Discretionary input Maturity date 5 Regulator Trigger Tokenized Smart Bank instrument Trigger options Trigger options contract Below  condition? Regulator Future-state process description 1 Similar to the current state, the 3 The tokenized bond includes key attributes, including a loan 7 After a bank or regulator issuing bank determines the absorption trigger, issuing bank, coupon rate and maturity date provides discretionaryinput trigger option through a book- 4 The bank analyses the current capital ratio to determine if loan into conversion (can be value or market-value absorption needs to be activated automated in the future), loan calculation to activate loan 5 The latest calculation is added directly to the tokenized asset for the absorption can be activated absorption, and initiates bond bond, providing investors and regulators with transparency into the through a smart contract issuance 2 status of their issued “CoCo” bonds 8 The “CoCo” bond is converted The bank issues a tokenized 6 If the trigger is reached, regulators and bank leadership are notified in into equity at a predetermined “CoCo” bond to raise funds real time through a smart contract conversion rate from investors, utilizing the record-keeping functionality of DLT WORLD ECONOMIC FORUM | 2016 88

Contingent Convertible ("CoCo") Bonds Future-state benefits Issuance Monitoring (ongoing) Loan absorption Bond Select based Market Equity request on criteria Liabilities Smart 1 Assets contract Bank Bank “CoCo” 5 Bank Investors 2 rt Bank bond Smart Investors “CoCo” bond Capital ratio: 7.49% Yes Ale3 contract Coupon rate Discretionary input Maturity date Regulator Trigger Tokenized Smart Bank instrument 4 Trigger options Trigger options contract Below  condition? Regulator Future-state benefits 1 Increased participation: up-to- 2 Improved calculations: integrating capital ratio calculations directly 5 Real-time activation time: since date capital ratio information into DLT can improve data input maturity and calculation frequency the frequency of the trigger stored within DLT can increase across banks calculation and reporting confidence and lead to 3 Real-time reporting: regulators can be notified in real time through a increases through DLT, the time developing a “CoCo” bond to convert a “CoCo” bond into rating system, enabling large smart contract if a “CoCo” bond trigger is reached equity after the condition is met institutional investors to 4 Reduced stress tests: since regulators have access to a bank’s capital significantly reduces participate within the market ratio in real time, bank equity volatility can be reduced as the likelihood for point-in-time stress tests decreases WORLD ECONOMIC FORUM | 2016 89

Contingent Convertible (“CoCo”) Bonds Critical conditions Standardizing attributes for Streamlining trigger calculations Developing processes to act on soliciting investment across FIs real-time trigger notifications Regulators across markets must initiate Regulators must impose standards for FIs to Regulators and bank leadership must develop conversations with FIs that issue “CoCo” bonds streamline their methodologies behind trigger the business processes required to act on real- to develop standardized attributes that can be calculations, and the frequency that results will time trigger notifications to determine if loan used by investors to make data-driven be entered into the tokenized “CoCo” bond absorption should be activated at that FI and investment decisions instruments across the market Why? Why? Why? Data fields and templates must be Investor confidence in “CoCo” bonds can only Since the viability of “CoCo” bonds is in standardized to tokenize “CoCo” bonds across increase if standardization exists within the question due to loan absorption, transparency FIs within the distributed ledger calculation process and, subsequently, loan is required in order for investors to continue absorption investments Challenge Challenge Challenge Each market requires different data to be Each FI currently calculates trigger values Regulators may require a significant process provided when issuing “CoCo” bonds; data field independently and with varying degrees of overhaul since they are traditionally restricted units are currently not standardized across FIs automation to point-in-time stress tests to analyse an FI’s capital ratio Critical condition categories WORLD ECONOMIC FORUM | 2016 Stakeholder Technology Regulatory Governance 90 alignment

Contingent Convertible (“CoCo”) Bonds Conclusion Summary Outlook • Improved monitoring: Ongoing monitoring can be standardized • No significant applications of DLT within the “CoCo” bond life across FIs while ensuring that regulators receive real-time cycle have been reported or discussed within blockchain notifications of impending loan absorption activation researchreleased to date • Increased investor confidence: Ensuring that processes exist to • While benefits associated with process execution and reporting improve visibility into monitoring and loan absorption will costs exist, a majority of benefits are ancillary and focused on increase investor confidence and, potentially, participation improving market stability • Opportunity exists for regulators to push standardized capital ratio calculations across FIs and to reduce volatility associated with requesting point-in-time stress tests Key takeaways Unanswered questions • Ensure educated and empowered investors: Tokenized bond • Business drivers:Since loan absorption is an indication that a instruments can enable investors to make informed, data- broader crisis may be taking place, is reduced market volatility driven decisions; improved monitoring processes can reduce enough of a driver to warrant investment? market uncertainty • Allow point-in-time stress tests to become irrelevant: Smart contracts can alert regulators when loan absorption needs to be activated, while ensuring that “over-reporting” is not a concern WORLD ECONOMIC FORUM | 2016 91

Section 5.6 Investment Management: Automated Compliance WORLD ECONOMIC FORUM | 2016 92

Automated Compliance Introduction Current-state background FIs are responsible for complying with and reporting on a multitude of regulatory requirements. These activities may be executed internally by a functional area within the organization or via a third party. Audit, tax, CCAR and routine Securities and Exchange Commission (SEC) filing (10K/10Q) are just a few compliance-related activities that add additional cost to FIs’ annual spend. Key ecosystem stakeholders Overview Financial Institution • Compliance costs are high: Compliance activities are a major portion of Auditor the cost overhead FIs deal with. In 2014 the largest FIs spent US$ 4 billion 1 in compliance-related activities • Auditing costs are high: Auditing represents one of the largest annual compliance costs for FIs. On average, public companies paid in excess of Regulator US$ 7.1 millionin audit fees in 20132 Internal Revenue Accountant Service DLT has the potential to increase operational efficiencies and provide Federal regulators with enhanced enforcement tools. This use case focuses on the key Reserve opportunities in the financial statement audit process to highlight an automated compliance solution 1. Banks face pushback over surging compliance and regulatory costs, WORLD ECONOMIC FORUM | 2016 Financial Times, 2015. 93 2. 2015 Annual Audit Fee Report, Financial Executives Research Foundation, 2015.

Automated Compliance Key market participants Market participant Role Description Auditor Core Individual(s) who perform(s) the financial statement examination and provide(s) reasonable assurance of the financials via the audit opinion Financial Institution Core An entity providing the financial statements and requesting the audit opinion Regulator Supporting A monitor who verifies adherence to audit activities (e.g. the CCAR regulator is responsible for verifying requisite capital is on hand to conduct operations) Accountant Additional Individual(s) responsible for reviewing, preparing and filing the tax statements on participant behalf of the FI Federal Reserve Additional The US government organization responsible for supervising and regulating participant banking institutions Internal Revenue Service Additional The US government organization responsible for tax collection and tax law participant enforcement WORLD ECONOMIC FORUM | 2016 94

Automated Compliance Current-state process depiction Planning Assessment Follow-up Reporting 1 Risk assessment Bank 5 Auditor Bank Material 3 Identified errors 7 Audit scope information Accounts Accounts 4 payable receivable Independent 8 Auditor Objectives Bank Auditor Supporting Bank audit report documentation 2 Auditor 6 10K/10Q Current-state process description 1 Annually, auditorscoordinate 3 The bank provides the audit 5 Throughout the process, 7 At the conclusion of the with the bank to perform the team with copies of financially auditors work directly with the evaluation, the audit team required audit of financial material data and access to the leadership and representatives releases an opinion of the statements systems that enable analyses to from the bank to address overall financial health of the 2 Members of the audit team be conducted identified errors within the data bank in the form of an work directly with the bank to 4 Auditorsevaluate the and testing exceptions independent audit report perform an initial risk information provided for 6 Asexceptions are identified, the 8 The bank uses the results of the assessment and align on the completeness and conduct tests audit team requests additional report to populate its quarterly scope, objectives, timing and for accuracy in parallel to information to determine the and annual filings resources required performing the evaluation depth of the concern (10K/10Q) WORLD ECONOMIC FORUM | 2016 95

Automated Compliance Current-state pain points Planning Assessment Follow-up Reporting 1 Risk assessment Bank 2 Auditor Bank Material Accounts Accounts Identified errors Audit scope information 3 payable receivable Independent 5 Auditor Objectives Bank Auditor Supporting Bank audit report documentation Auditor 4 10K/10Q Current-state pain points 1 Resource-intensive: scope 2 Time-intensive review: pulling 4 Resource-intensive: exception 5 Lack of technology integration: formation, risk assessment and sample data for audit review is and error follow-up requires information provided in the audit planning require time-intensive and inefficient additional interaction with independent audit report does representatives from multiple due to dependency on manual representatives from multiple not feed directly into quarterly functional areas, reducing activities functional areas, further and annual filings (10K/10Q), productivity as individual 3 Lack of technology integration: reducing productivity duplicating efforts employees cannotcomplete information is copied from their daily activities source systems and provided to auditors, adding inefficient manual processes that increase the likelihood of errors WORLD ECONOMIC FORUM | 2016 96

Automated Compliance Future-state process depiction DLT financial data extraction layer Income Assets Accounts Losses Liabilities Accounts Depreciation Management receivable payable assertions 1 6 Assessment Reporting Additional compliance activities Independent Comprehensive Capital Assessment Review Accessed audit report 5 Federal through DLT Bank Regulator + Reserve 2 Accounts Accounts Auditor payable receivable Auditor Stored on DLT Smart Enterprise tax filing 4 contract + + 3 10K/10Q Accountant IRS Future-state process description 1 Financially material information is accessible 3 Theauditteam performs an audit evaluation 6 Inthe future, DLT is uniquely positioned to to auditors in real time through the use of a using data directly from the DLT, eliminating seamlessly execute and automate financial DLT enabled data extraction layer errors generated from manual activity and compliance activities such as: Since auditors have authorized access to this the requirement for follow-up - Comprehensive Capital Assessment 2 data, representatives and leadership of the 4 Auditors develop the independent audit Review (pictured) bank do not need to be involved with audit report and store it on the DLT for real-time - Enterprise tax filing (pictured) planning and data distribution access by the bank and regulator - Real time tasks for trading in financial 5 A smart contract facilitates the movement of instruments (e.g. insider trading) information from the audit report to - Processing information about new financial reporting instruments, minimizing regulatory developments duplicate efforts WORLD ECONOMIC FORUM | 2016 97

Automated Compliance Future-state benefits DLT financial data extraction layer Income Assets Accounts Losses Liabilities Accounts Depreciation Management receivable payable assertions 1 Assessment Reporting Additional compliance activities 5 6 Independent Comprehensive Capital Assessment Review Accessed audit report 4 Federal through DLT Bank Regulator + Reserve 2 Accounts Accounts Auditor payable receivable Auditor Stored on DLT Smart Enterprise tax filing contract + + 3 10K/10Q Accountant IRS Future-state benefits 1 Data transparency: enabling data stored 3 Reduced errors: audit teams have In the future, DLT can enable additional within financial systems to be accessible via authorizedaccess to financial data, compliance activities to be seamlessly executed DLT through the financial data extraction eliminating errors generated by manual through automation: layer provides immutable and transparent activities and streamlining the update • The bank provides Federal Reserve officials records that are updated in real time process 5 with authorized access to facilitate 2 Automated review: financialinformation 4 Integrated systems: reporting activities automated capital analysis and store results accessible via DLT enables an automated executed via DLT facilitates the creation of on DLT review via audit software, reducing the time quarterly and annual filings, reducing • Thebank provides tax accountants with and resources required to perform these duplicate efforts 6 authorized access to real-time financial data activities to facilitate tax calculations and automate IRS tax payments WORLD ECONOMIC FORUM | 2016 98

Automated Compliance Critical conditions Providing compartmentalized Automatingfaster and efficient Enabling interoperability with access to data enforcement of regulations legacy platforms The DLT solution must ensure access can be FIs and regulators must transition to a real- Legacy platforms of FIs and regulatory agencies authorized at the financial category level (e.g. time cadence for sharing financially material must be capable of feeding data directly into assets, liabilities, etc.) information and extracting data from the distributed ledger Why? Why? Why? To mitigate risk, external users should only Providing regulators with real-time transparent To facilitate process automation, technology have access to financial data that is material to access to financial data enables the regulatory platforms must be capable of transmitting and their compliance activity enforcement of compliance-related activities receiving data on the distributed ledger Challenge Challenge Challenge Current DLT solutions authorize access to the Given no legal/regulatory precedent, FIs and regulatory agencies use multiple ledger as a whole and do not provide the establishing a shared arrangement between technology solutions that may be incapable of capability to partition access the regulator and FIs will be arduous interfacing with the ledger Critical condition categories WORLD ECONOMIC FORUM | 2016 Stakeholder Technology Regulatory Governance 99 alignment

Automated Compliance Conclusion Summary Outlook • Process automation: Audit examination activities are executed • Applications of DLT within automated compliance are currently via automated audit software, dramatically reducing the time being explored at the proof-of-concept level with a number of and resources required to perform the audit incumbents, focusing on: • Regulatory transparency:Audit officials are authorized access - Continuous auditing to pertinent financial information to execute the audit - AML/KYC verification examination - Automated tax filing • Cost savings: DLT can provide major cost savings in process • Opportunities exist for FIs to reduce headcount and manual execution and reporting activities: - Eliminating planning/follow-up activities - Automating assessment/reporting activities Key takeaways Unanswered questions • Audit continuously: The convergence of automated audit • Continuous auditing: Will more frequent financial statement software and access to real-time financial information facilitate audits (potentially continuous) have adverse effects on investor continuous auditing, which provides greater confidence in the decisions? financial health of the organization • Extract financial data: Financial information stored on a distributed layer facilitates the automated execution of additional compliance activities (e.g. CCAR, tax filing, etc.) WORLD ECONOMIC FORUM | 2016 100

Section 5.7 Investment Management: Proxy Voting WORLD ECONOMIC FORUM | 2016 101

Proxy Voting Introduction Current-state background Proxy voting facilitates remote investor voting on topics discussed during annual corporate shareholder meetings without requiring attendance. To ensure investors are able to make an informed decision, corporations are responsible for distributing proxy statements. Currently, a third party is responsible for delivering these statements to investors in partnership with intermediaries that track order execution. Investors conduct a manual analysis before casting their vote directly to the third party. Key ecosystem stakeholders Overview • Retail investor participation is low compared to institutional investor Regulator Corporation participation: On average, institutions voted 83% of their shares, while retail investors voted 28% of their shares1 • As a result, significant participation in elections is lacking each year: From 1 July to 31 December 2015, approximately 24 billion shares remained “un-voted” as a result of this turnout1 • Efforts are being launched to improve retail participation: As investor activism strengthens, leadership is recognizing the need to engage all shareholders throughout the voting process Third Party/ Investor DLT has the potential to transfer value irrefutably. This use case highlights the Intermediaries key opportunities to improve retail investor participation in proxy voting 1. ProxyPulse: First Edition 2016, ProxyPulse. WORLD ECONOMIC FORUM | 2016 102

Proxy Voting Key market participants Market participant Role Description Corporation Core The publicly traded entity that would like to improve proxy voting response rates by implementing a DLT solution Investor Core Anindividual and/or institution that participates in the voting process by receiving proxy statements and casting a vote via phone, mail or online channels Third Party/Intermediaries Supporting Entities that facilitate the proxy voting process, while ensuring that statements are distributed to all beneficial investors Regulator Supporting A monitorwho ensures proxy statements are distributed to all investors and the voting process is completed without any illegal or suspicious activity WORLD ECONOMIC FORUM | 2016 103

Proxy Voting Current-state process depiction Distribute proxy statement Review proxy statement Cast vote 3 Provide beneficial investor information in Proxy Cast partnership with the statements vote Depository Trust & Intermediaries Clearing Corporation or 4 5 6 7 Online or 1 or Third party Online Mail Investors Analyse potential Investors Third Results 2 voting impact or party released Corporation Provide notice that proxy statements are Mail Regulator accessible by investors Current-state process description 1 The corporation develops a proxy statement 4 Investors analyse the proxy statement to 5 Investors cast their vote directly to the third- internally in partnership with various teams, determine the potential impact of the votes party organization either online or by mail or including general counsel and accounting being solicited during a corporation’s phone 2 The corporation simultaneously provides a shareholder meeting 6 Results are not shared with investors or the third-party organization with the documents corporation throughout the voting process to distribute to shareholders (via online and 7 During the shareholder meeting, votescast mail) and notifies the regulator that the by attendees are aggregated with those proxy statement is available submitted by proxy and announced 3 The third-partyorganization works with intermediaries to obtain beneficial investor information that may not be available WORLD ECONOMIC FORUM | 2016 104

Proxy Voting Current-state pain points Distribute proxy statement Review proxy statement Cast vote 1 Provide beneficial investor information in 4 Proxy Cast partnership with the statements vote Depository Trust & Intermediaries Clearing Corporation or 5 7 8 9 Online or 2 6 Third party Online Mail Investors or Analyse potential Investors Third Results 3 voting impact or party released Corporation Provide notice that proxy statements are Mail Regulator accessible by investors Current-state pain points 1 Ambiguity: asingle view into the total 4 Misleading representation: summaries 7 Minimal retail investor participation: in the population of registered and beneficial within proxy statements can provide a United States (and other countries investors does not exist without misleading view into a corporation’s health worldwide), a majority of shares owned by intermediaries 5 Error prone: in some cases, minor data retail investors go unvoted each year 2 Costly distribution process: since the online errors are uncovered by institutional 8 Lack of transparency: the corporation and portal for statement distribution can only investors conductingdetailed analyses voters do not receive insight into the process occur if an investor has “opted-in”, 6 Manual intensive process: given the length until they are made available by the third significant print and mail expenses are and unstructured format of proxy party incurred statements, investors have to manually 9 Voting discrepancies: the number of shares 3 Limited distribution: depending on the determine the information that will help held by investors may differ from the market, proxy statements cannotbe shared facilitate an informed decision number of votes cast; depending on the with institutional investors, restricting the regulation, these votes are either adjusted number of potential votes that can be cast or not counted WORLD ECONOMIC FORUM | 2016 105

Proxy Voting Future-state process depiction Distribute proxy statement Review proxy statement Cast vote 1 Investor Corporation Investment Proxy Cast Details Name Records statements vote Proxy Proxy 4 5 6 statement statement 3 2 Online Investors or Smart Results Corporation Smart contract Investors Investors or Analyse potential contract released voting impact or Provide notice that Validate votes by proxy statements are Mail comparing to ownership accessible by investors Regulator data Future-state process description 1 As orders are executed to invest in a 3 Investors analyse the proxy statement to 4 Investors cast their vote either online or by corporation’s equity, DLT stores investment determine the potential impact of the votes mail or phone directly into the DLT as a records including the number of shares being solicited during a corporation’s tokenized asset through back-end 2 After a corporation has finalized its proxy shareholder meeting through DLT’s transfer infrastructure integration statement, a smart contractensures that it is of value capability 5 A smartcontractensures votes are valid by sent to all investors (via an online portal or comparing the number of votes cast to mail) and the regulator is notified that the ownership data documents are available 6 Results are shared with the corporation and/or investors in real time or during a shareholder meeting WORLD ECONOMIC FORUM | 2016 106

Proxy Voting Future-state benefits Distribute proxy statement Review proxy statement Cast vote 1 Investor Corporation Investment Proxy Cast Details Name Records statements vote Proxy Proxy 7 5 6 statement statement 3 2 Online 4 Investors or Smart Results Corporation Smart contract Investors Investors or Analyse potential contract released voting impact or Provide notice that Validate votes by proxy statements are Mail comparing to ownership accessible by investors Regulator data Future-state benefits 1 Disintermediation: since all investment 3 Improved accessibility and participation: 5 Automated validation: smart contracts can records are stored on DLT, partnerships with DLT can increase the mechanisms that can ensurethat voting is aligned to share a third-party organization and intermediaries be used to access proxy statements (e.g. ownership at the time of the vote are not required; a smart contract can notify native mobile applications) 6 Increased transparency: depending on regulators of proxy statement availability 4 Future automated analyses: in the proposed requirements, voting data could be made and ensure distribution to investors future state, the current proxy statement available to the corporation and/or voters in 2 Streamlined distribution process: DLT can format will continue to be distributed to real time reduce the costs associated with printing investors, but future implementation can 7 Improved accessibility and participation: and mailing proxy statements(difficult to enable investors to conduct personalized, DLT can increase mechanisms used to cast compute savings since investor must “opt- automated analyses votes (e.g. native mobile applications) in”) WORLD ECONOMIC FORUM | 2016 107

Proxy Voting Critical conditions Storing investment records Integrating legacy voting Collaborating across actors to on a distributed ledger mechanisms into tokens ensure success Corporations and/or exchanges must store all To ensure investors have a broad set of Corporations may choose to partner among investment records on a distributed ledger in mechanisms to cast votes, systems will need to each other and/or exchanges to minimize order to identify beneficial investors without be developed to convert votes cast via mail or parallel development, while providing investors the need for intermediaries phone into tokens that can be stored on the with confidence that the voting system is not distributed ledger susceptible to corruption Why? Why? Why? Third parties currently work directly with Proxy voting must be accessible by investors If each corporation develops a voting solution, central securities depositors to ensure across demographics to ensure no investors will not be able to standardize investors are engaged appropriately discriminatory consequences exist during the analysis across investments; conflict of interest throughout the process process concerns may exist Challenge Challenge Challenge Ensuring that all investment records are stored To ensure no manual processes exist while Process and liability models must be on a distributed ledger with corresponding converting votes cast via mail into tokens, established to outline alternative procedures in digital identities will require industry discussion creative solutions will need to be developed to the event the smart contract does not regarding whether equity post-trade activities read voter responses autonomously and with successfully validate and/or count votes should also be facilitated through DLT complete accuracy Critical condition categories WORLD ECONOMIC FORUM | 2016 Stakeholder Technology Regulatory Governance 108 alignment

Proxy Voting Conclusion Summary Outlook • Streamlined distribution: Smart contract technology reduces • Applications of DLT within proxy voting are currently being manual processes associated with proxy statement distribution, explored at the proof-of-concept level by incumbent reducing the time and manpower required to perform the exchanges: process - NASDAQ • Automated reconciliation: Smart contract technology prevents • Opportunities exist for FIs to improve participation and investors from casting more votes than the shares they own accessibility to: and provides real-time updates for error correction, potentially - Proxy statements increasing the total number of counted votes - Vote casting mechanisms Key takeaways Unanswered questions • Ensure voting transparency:The potential exists for DLT to • Cost vs benefits: When voting operations are executed faster provide a transparent view of voting data during annual and at lower cost, will voting frequency increase? Additionally, shareholder meetings will this change the relationship between companies and • Provide central authority disintermediation: Investment activist investors? records stored on the distributed ledger and proxy statements disseminated via smart contract technology eliminate the need for third-party intermediaries and associated fees WORLD ECONOMIC FORUM | 2016 109

Section 5.8 Market Provisioning: Asset Rehypothecation WORLD ECONOMIC FORUM | 2016 110

Asset Rehypothecation Introduction Current-state background Asset rehypothecation is a common practice in which FIs securitize existing collateral to reduce the cost of pledging collateral in subsequent trades. As assets are rehypothecated, ownership structures and asset composition can become ambiguous due to the lack of clear transaction and ownership history, exacerbating counterparty risk and asset valuation uncertainty. Regulatory constraints are designed to limit the extent to which an asset can be rehypothecated, but without a mechanism for tracking transaction history, enforcement is not possible. Key ecosystem stakeholders Overview • The secondary trading market is large: Secondary trading has become an extremely common practice, driving its volume in the US loan market to Broker/Dealer US$ 628 billion in 20141 Regulator • Secondary market trading is increasing: Although the secondary trading market is already substantially large, it continues to grow; between 2013 and 2014 secondary trading volume increased by 21%1 Buying Selling Investor Investor DLT has the potential to optimize the regulatory components of asset rehypothecation.This use case highlights the key opportunities to improve information transfer in the end-to-end broker/dealer process 1. 4th Quarter 2014 Secondary Trade Data Study, WORLD ECONOMIC FORUM | 2016 The Loan Syndications and Trading Association. 111

Asset Rehypothecation Key market participants Market participant Role Description Broker/Dealer Core An entity that assists investors in buying or selling securities Selling Investor Core An entity or individual attempting to sell the security Buying Investor Core An entity or individual attempting to purchase the security Regulator Supporting A monitor that verifies adherence to regulatory requirements WORLD ECONOMIC FORUM | 2016 112

Asset Rehypothecation Current-state process depiction Two counterparties Three counterparties Four counterparties Five counterparties 1 Cash US SEC limits rehypothecation Collateral to 140% 5 7 9 Customer 2 Bank Each section 3 75% of obtained : 75% 6 : 75% : 75% represents ¼ of Bank collateral 4 Investment 75% of obtained Hedge 100% of obtained collateral value bank collateral fund collateral 8 Rehypothecation percentage: 0% Rehypothecation percentage: 75% Rehypothecation percentage: 131.25% Rehypothecation percentage: 187.5% The customer maintains possession of the home Current-state process description 1 A customer acquires a loan 4 The bank securitizes a portion 6 The investment bank 8 The hedge fund uses a from a bank to purchase a (75% within the example) of the repackages the debt obtained broker/dealer to sell a home mortgagedebt along with other (75% of 75% within the derivative in over-the-counter 2 In exchange, the customer mortgages and sells it to an example) into a security (e.g. markets, where the underlying provides the bank with the investment bank mortgage-backed), which is asset is the rehypothecated house as collateral and 5 The investment bank now has further divided into tranches percentage obtained (100% of authorizes rehypothecation to 75% of the house value in and sold to a hedge fund based 75% of 75% within the example) improve the rate collateral that can be used in on its risk appetite 9 The ownership and collateral 3 During the mortgage repayment subsequent trades 7 The hedge fund has now value becomes ambiguous, period, the bank may use the secured 56.25% of the original creating a scenario where the house as collateral in house value (that can be used in total value pledged far exceeds subsequent transactions subsequent trades) origination WORLD ECONOMIC FORUM | 2016 113

Asset Rehypothecation Current-state pain points Two counterparties Three counterparties Four counterparties Five counterparties Cash US SEC limits rehypothecation Collateral to 140% 3 4 Customer Bank Each section 75% of obtained : 75% : 75% : 75% represents ¼ of Bank collateral 2 Investment 75% of obtained Hedge 100% of obtained collateral value 1 bank collateral fund collateral 5 Rehypothecation percentage: 0% Rehypothecation percentage: 75% Rehypothecation percentage: 131.25% Rehypothecation percentage: 187.5% The customer maintains possession of the home Current-state pain points 1 Lack of regulatory reporting: 2 Counterparty risk: investors 4 Security value ambiguity: since 5 Systematic failure: if default within secondary trading lack insight into additional a detailed transaction history is occurs with any of the players, a markets, reporting counterparties with ownership not maintained, each trade part or even the entire requirements do not detail the claims to the asset leveraging a percentage of the transaction chain is affected, transaction history of the asset 3 Lack of transparency: collateral makes it more difficult which mayhave unintended (e.g. purchase price, purchase regulators do not have the to determine the true value of consequences on adjacent date and loan originator) or ability to track securities as they the asset operations in the financial other counterparties with are rehypothecated in the system claims to the asset market, making enforcement of regulator limits nearly impossible WORLD ECONOMIC FORUM | 2016 114

Asset Rehypothecation Future-state process depiction Two counterparties Three counterparties Four counterparties Five counterparties Cash Smart Smart Smart 6 contract 3 contract contract ✘ Collateral   < 140% regulatory limit < 140% regulatory limit < 140% regulatory limit ✘ Customer 1 Bank Each section 2 75% of obtained : 75% 5 : 75% : 75% represents ¼ of Bank collateral 4 Investment 75% of obtained Hedge 100% of obtained collateral value bank collateral fund collateral Rehypothecation percentage: 0% Rehypothecation percentage: 75% Rehypothecation percentage: 131.25% Rehypothecation percentage: 187.5% The customer maintains possession of the home Future-state process description 1 Collateral obtained by the bank 3 In subsequent trades, the smart 5 Regulators receive authorized 6 The smart contract restricts the is tokenized to record the contract broadcasts the real-time access to view the additionalhypothecation of the transaction history of the transaction history details (e.g. transaction details and monitor asset once predetermined underlying asset on DLT collateral value and regulatory infractions regulatory rehypothecation 2 A smartcontract encapsulates counterparty information) to limits are met the tokenized collateral and participating entities facilitates record-keeping and 4 Investors receive a transparent the transfer of value view of the asset history along with associated counterparty information (via the counterparty rating system) to enhance trade decisions WORLD ECONOMIC FORUM | 2016 115

Asset Rehypothecation Future-state benefits Two counterparties Three counterparties Four counterparties Five counterparties Cash Smart Smart Smart contract 3 contract 5 contract ✘ Collateral   < 140% regulatory limit < 140% regulatory limit < 140% regulatory limit ✘ Customer 1 Bank Each section 2 75% of obtained : 75% 6 : 75% : 75% represents ¼ of Bank collateral 4 Investment 75% of obtained Hedge 100% of obtained collateral value bank collateral fund collateral 7 Rehypothecation percentage: 0% Rehypothecation percentage: 75% Rehypothecation percentage: 131.25% Rehypothecation percentage: 187.5% The customer maintains possession of the home Future-state benefits 1 Transparency: thecollateral 3 Automated processing: DLT 5 Automated enforcement: a 7 Disintermediation: a smart value, risk position and increases processingefficiency, smart contract ensures assets contract facilitates the ownershiphistory are reducing manual processes and are not rehypothecated over movement of funds and assets, transparent to investors, aiding associated costs regulatory limits eliminating the need for costly in investment decision-making 4 Embedded regulation: 6 Financialstability: the intermediaries 2 Counterparty risk: regulators maintain a clear view enforcement of regulatory counterparties are rated based of the asset history (e.g. value, controls and the transparent on transaction history, enabling ownership and risk position), transaction history greatly investors to hedge their risk by enabling the enforcement of reduce the risk of systematic selecting a counterparty that regulatory constraints failure in the event of default best fits their risk profile WORLD ECONOMIC FORUM | 2016 116

Asset Rehypothecation Critical conditions Tokenizing assets using a shared Fostering engagement among the Architecting solution to manage standard financial ecosystem over-the-counter (OTC) templates FIs and technology providers must work FIs throughout the financial system must agree Technology providers must design a flexible together to tokenize collateral linked assets to participate in a tokenized asset trading distributed ledger solution that accounts for within the financial system system and comply to the agreed upon rules non-standard and future formats of OTC and regulations templates Why? Why? Why? To track assets and calculate rehypothecation To accurately track assets as they move While the ledger will most likely refer to percentages via smart contract, collateral through the financial system, all FIs conducting documents stored externally, the solution must tokenization is required trades must participate in the distributed- be flexible in case modifications to OTC ledger-based solution templates are require in the future Challenge Challenge Challenge A tokenization standard among FIs will be DLT is still unproven; a framework for FIs and technology providers will need to difficult to establish, as will incorporating participation must be established and support collaborate to ensure flexibility and minimal legacy assets into the distributed ledger from the financial services community must be downstream impacts to smart contracts gained Critical condition categories WORLD ECONOMIC FORUM | 2016 Stakeholder Technology Regulatory Governance 117 alignment

Asset Rehypothecation Conclusion Summary Outlook • Asset tokenization: Collateralized assets are tokenized and • Applications of DLT within asset rehypothecation are currently stored on the distributed ledger where transaction history being explored at the proof-of-concept level with a number of details are stored in perpetuity incumbents, focusing on: • Regulatory transparency:Compliance officials maintain a real- - Gold markets time view of asset transaction history (value, ownership, risk - Repurchase markets position) to assist in the enforcement of regulatory control - Asset transfer limits • Opportunities exist for counterparty risk reduction and • Collaboration: successful implementation of DLT would require enhanced regulatory enforcement tools: a significant amount of standardization and normalization of - Counterparty rating system static data between market participants - Asset transaction history storage - Regulatory transparency - Smart contract enforcement Key takeaways Unanswered questions • Reduce counterparty risk:The transparent view of asset • Asset history tokenization: Identifying asset value, ownership history (value, ownership and risk position), coupled with a and risk position is a major challenge in today’s financial counterparty rating system, assists investors in aligning their system, so how will this issue be resolved so that transaction risk appetite with potential trade partners histories can be stored on the ledger? • Financial system stability: smart contract technology • Will regulators require OTC markets to comply with this terminates trades that violate regulatory controls, reducing the implementation? propensity of systemic failure within the financial system and improving collateral management WORLD ECONOMIC FORUM | 2016 118

Section 5.9 Market Provisioning: Equity Post-Trade WORLD ECONOMIC FORUM | 2016 119

Equity Post-Trade Introduction Current-state background Equity post-trade processes enable buyers and sellers to exchange details, approve transactions, change records of ownership and exchange securities/cash. These processes are initiated after an investor receives confirmation of an executed trade from the exchange. Central Securities Depositories (CSDs), working in partnership with custodians, match trades and validate investor credentials. After successful validation, Central Clearing Counterparties (CCPs) net all transactions and transfer cash/equity to all involved custodians. Custodians store assets in safekeeping accounts in partnership with CSDs, who are responsible for initiating asset servicing (e.g. income distribution and proxy voting) as required. Key ecosystem stakeholders Overview Custodian Bank • Significant volume exists within the equity market: The NYSE, for example, processes millions of trades and billions of shares each day1 • Processes are time-intensive: Following confirmation of a trade, post- Investor trade settlement and clearing processes take anywhere from one to three days to complete (depending on the market) Exchange • Intermediaries are costly: Within the United States, banks, central agency bodies and intermediaries generate approximately US$ 9 billion in 2 various post-trade activities Central Securities Central Depository Clearing DLT has the potential to improve the efficiency of asset transfer. This use case Counterparty highlights the key opportunities to streamline clearing and settlement processes in cash equities 1. NYSE: Transactions, Statistics and Data Library, 2016. WORLD ECONOMIC FORUM | 2016 2. Charting a Path to a Post-Trade Utility, Broadridge, 2015. 120

Equity Post-Trade Key market participants Market participant Role Description Custodian Bank Core An entity that investors use to place trades with the exchange, and that manages post-trade processes and stores assets for servicing Investor Core An individual or organization that instigates equity post-trade processes by initiating a trade Central Securities Core The entity that supports matching trade sections prior to settlement and facilitates Depository asset servicing processes Central Clearing Core The central body that manages counterparty credit risk during settlement by Counterparty acting as the buyer to the seller and vice versa to the buyer Exchange Supporting Theentity that matches equity “buy” and “sell” orders on behalf of investors, and confirms them prior to successful post-trade processes WORLD ECONOMIC FORUM | 2016 121

Equity Post-Trade Current-state process depiction Equity trade execution Clearing Settlement Asset servicing 1 4 Cash Equity SELL 100 3 Investor 1 2 Investor 1 Custodian 1 CSD Custodian 1 5 CCP 6 Custodian 2 Investor 1 Investor 2 7 Investor 3 Trade date/ Safekeeping accounts Bank 1 details SELL 100 Settlement Investor 2 Exchange Investor 2 Custodian 1 date Investor 1 Investor 3 BUY 100 Counterparty Custodian 1 CSD Custodian 2 bank details Cash 8 * Trade commitments Investor 2 Distribute Corporate Proxy Bank 2 Investor 3 confirmation Investor 3 Custodian 2 Validation income actions statements Current-state process description 1 Investors use interfaces 3 Utilizing securities settlement 5 After matching all sections of 7 After the required assets are provided by the bank of their systems, custodian banks send the trade, CCPs determine the transferred, equity and cash are choosing to place equity trade their section of the trade details “net transaction” across all stored in safekeepingaccounts orders through the exchange to the CSD on behalf of the trades and custodianbanks to managed in partnership by 2 The exchange is responsible for investor minimize the number of custodian banks and the CSD matching the equity trade 4 The CSD is responsible for required transactions 8 As various servicing processes orders placed by investors validating the trade details 6 The simultaneous transfer of occur, third parties work across banks in order to confirm provided by all custodian banks equity and cash is managed by directly with the CSD to ensure trades in real time and initiate (e.g. cash commitments and the CCP between custodian custodian banks and, ultimately, post-trade processes settlement date) and matching banks on behalf of all involved investors are engaged all sections of the trade investors WORLD ECONOMIC FORUM | 2016 122

Equity Post-Trade Current-state pain points Equity trade execution Clearing Settlement Asset servicing 2 Cash Equity SELL 100 3 Investor 1 1 Investor 1 Custodian 1 CSD Custodian 1 CCP Custodian 2 Investor 1 Investor 2 6 Investor 3 Trade date/ 4 Bank 1 details Safekeeping accounts SELL 100 Settlement Investor 2 Exchange Investor 2 Custodian 1 date Investor 1 Investor 3 BUY 100 Counterparty 5 Custodian 1 CSD Custodian 2 bank details Cash 7 * Trade commitments Investor 2 Distribute Corporate Proxy Bank 2 Investor 3 confirmation Investor 3 Custodian 2 Validation income actions statements Current-state pain points 1 Duration between trade 2 Inconsistent data: as a result of 4 Operational risk: CCPsmust 6 Safekeeping account execution and settlement: frequent changes to account for the possibility that complexity: since securities despite investors being able to counterparty bank details, CSDs technology and/or manual settlement systems connect see traded assets in their must manually validate a errors result in inaccurate safekeeping accounts across account shortly after receiving number of transactions prior to settlement custodian banks at the CSD, confirmation, settlement occurs settlement 5 Settlement ambiguity: custodians have limited t+3, which limits the actions 3 Counterpartyrisk: custodians investors are inconsistently flexibility to store assets that investors can take in the must account for the possibility notified when their trades settle 7 Costly intermediaries: interim that a counterparty is unable to depending on custodian corporations must involve third settle when due procedures parties and intermediaries to initiate asset servicing WORLD ECONOMIC FORUM | 2016 123

Equity Post-Trade Future-state process depiction Equity trade execution Clearing Settlement Asset servicing 1 4 Cash Equity SELL 100 3 5 6 Investor 1 2 Investor 1 Custodian 1 Smart Custodian 1 Smart Custodian 2 Investor 1 Investor 2 8 Investor 3 contract contract Bank 1 Safekeeping SELL 100 Trade date/ accounts Investor 2 Exchange Investor 2 Custodian 1 details Investor 1 Investor 3 Counterparty BUY 100 details 7 Custodian 1 Custodian 2 Cash Trade 9 * Trade commitments confirmation Distribute Corporate Proxy Bank 2 Investor 3 confirmation Investor 3 Custodian 2 Validation Investor 2 income actions statements Future-state process description 1 Similar to the current state, 3 Custodian banks send their 5 After matching all sections of 8 After required assets are investors use the interfaces section of the trade details to the trade, a smart contract transferred, equity and cash are provided by the bank of their the DLT on behalf of the determines the “net stored in safekeeping accounts choosing to place equity trade investor transaction” to minimizethe managed solely by custodian orders through the exchange 4 A smart contract validates the number of required banks 2 The exchange is responsible for trade details provided by all transactions 9 As various servicing processes matching the equity trade custodian banks (e.g. cash 6 Smart contracts ensure the occur, smart contracts notify orders placed by investors commitments and counterparty simultaneous transfer of equity custodian banks and investors across banks in order to confirm details) and matches all sections and cash between custodian in real time trades in real time and initiate of the trade in real time banks on behalf of all investors post-trade processes 7 Confirmation is stored in the DLT to facilitate future processes WORLD ECONOMIC FORUM | 2016 124

Equity Post-Trade Future-state benefits Equity trade execution Clearing Settlement Asset servicing 1 2 Cash Equity SELL 100 3 4 Investor 1 2 Investor 1 Custodian 1 Smart Custodian 1 Smart Custodian 2 Investor 1 Investor 2 6 Investor 3 contract contract Bank 1 Safekeeping SELL 100 Trade date/ accounts Investor 2 Exchange Investor 2 Custodian 1 details Investor 1 Investor 3 Counterparty BUY 100 details 5 Custodian 1 Custodian 2 Cash Trade 7 * Trade commitments confirmation Distribute Corporate Proxy Bank 2 Investor 3 confirmation Investor 3 Custodian 2 Validation Investor 2 income actions statements Future-state benefits 1 Reduced settlement time: 2 Standardizeddata 4 Reduced operational risk: 6 Reduced account complexity: through downstream, post- requirements:standardizing through the use of a smart custodians will be able to store trade automation and efficiency data fields for trade matching contract to transfer equity and assets with greater flexibility enhancements, settlement improves the efficiency of cash, the likelihood of since integration with securities could potentially be reduced to existing clearing processes technology and/or manual settlement systems will no real-time settlement, trade date 3 Reduced counterparty risk: 5 errors is decreased longer be required plus one day or trade date plus through automated validation, Real-time confirmation: by 7 Servicing disintermediation: two days custodians benefit from the storing trade confirmations on servicing activities initiated via a reduced likelihood that the DLT, investors can receive smart contract eliminate the counterparty is unable to settle notification of settlement need for third-party without relying on a custodian intermediaries WORLD ECONOMIC FORUM | 2016 125

Equity Post-Trade Critical conditions Incorporating “net transaction” Achieving multistakeholder Standardizing reference data benefits within settlement alignment across participants utilized to match trades Custodian banks and regulators will need to Regulators, custodian banks and exchanges Custodian banks will need to work together to work together to determine if and how to must work in partnership to develop a solution develop a standardized set of data fields that incorporate the benefits achieved by netting in that can handle billions of dollars in daily can match trades while providing investor order to minimize transactions and money transaction volume, while providing the anonymity and confidence in automation transferred across custodian banks economies of scale to benefit players of all sizes Why? Why? Why? CCPs aggregate executed trades to optimize Given the complexity of post-trade processes, The inability to standardize this data will cause the movement of assets; the inability to all entities involved must be willing to directly manual post-trade validation processes to still perform similar activities may add participate with one another to ensure market be required, inhibiting the disintermediation of inefficiencies to settlement stability CCPs and CSDs Challenge Challenge Challenge Since smart contracts execute commands in If CCPs will be disintermediated as a result of a Since traditional data fields used to match can real time, batching trades with some successful implementation of DLT, governance change frequently (e.g. bank details), predefined frequency may require and collaboration will be required to ensure a significant collaboration is required to customization liability model exists in case technology failures standardize attributes that are not prone to occur constant updates Critical condition categories WORLD ECONOMIC FORUM | 2016 Stakeholder Technology Regulatory Governance 126 alignment

Equity Post-Trade Conclusion Summary Outlook • Process automation: Clearing, settlement and servicing • Applications of DLT within equity post-trade are currently being activities are executed via automation, dramatically reducing explored at the proof-of-concept level with a number of the time and resources required to perform these processes incumbents and FinTechs, focusing on: • Reduced settlement time: Smart contract technology facilitates - Private equity trading customizable settlement timelines (real-time settlement, trade - Clearing and settlement solutions date plus one day, trade date plus two days), reducing the time • Opportunities exist for FIs to reduce costs and improve it takes to exchange assets operational efficiencies: • Cost savings: DLT can provide a globalcost reduction - Eliminating fees through disintermediation opportunityassociated with process execution and fee - Executing clearing and settlement via smart contract reduction Key takeaways Unanswered questions • Reduce operational risk:Simultaneous settlement of cash and • Real-time settlement: Will the savings associated with equity executed via smart contract reduces the likelihood of transitioning to faster settlement meet or exceed the value of manual errors and the resources required to execute the “float” revenues earned today by holding assets during the process settlement period? • Provide central authority disintermediation: Settlement and • What are the settlement implications of operating a “slow lane” servicing activities are executed via smart contract, eliminating and “fast lane” (i.e. real-time settlement and trade date plus costly fees three days)? WORLD ECONOMIC FORUM | 2016 127

Section 6 Contact Details

For additional information, please contact: WORLD ECONOMIC FORUM PROJECT TEAM PROFESSIONAL SERVICES LEADERSHIP FROM DELOITTE R. Jesse McWaters Rob Galaski Project Lead, Financial Services Deloitte Canada World Economic Forum [email protected] [email protected] Soumak Chatterjee Giancarlo Bruno Deloitte Canada Senior Director, Head of Financial Services Industries [email protected] World Economic Forum [email protected] WORLD ECONOMIC FORUM | 2016 129