Northern Trust recently announced that it has deployed legal clauses as smart contracts on its private equity blockchain platform. This move is part of the firm’s broader and long-term plan to evolve its technology and infrastructure. In a Q&A, Justin Chapman, global head of Market Advocacy and Innovation Research at Northern Trust, explains the drivers behind this move, how it improves data management and deliver benefits to clients.
Q. Northern Trust recently announced that it has deployed legal clauses as smart contracts on its private equity blockchain platform. Can you share with us why you have made this move now? What drove you to make strides in digitalization today?
The initial reason to develop this functionality was to allow for important data held in a paper copy document to be captured electronically at the time that the legal document was generated and for that data to be passed again in an electronic form directly to the core ledger. This would allow for a full straight through process (STP) to be achieved and reduce the risk of errors, rekeying of data and, of course, reduce the time taken to process the documents. By ensuring that the data is captured once at source, by the person that is initially generating it, and then using that data in all of the downstream applications from a golden single source is a very efficient way of developing applications. The fact that we did this via a set of smart contracts on our Guernsey based Private Equity Blockchain product also allowed us to put in place a fully transparent and highly efficient long term solution which will allow many participants (Investment Advisors / Legal firms / Investors / Auditors) not just Northern Trust to see the benefits of this new development.
This was supported by the recent change in law in Guernsey, “The Electronic Transactions (Electronic Agents) (Guernsey) Ordinance, 2019”, which was lodged in January 2019 now offers much greater certainty in the use of electronic agents.
Q. The financial industry has seen the move to digitalization already however, such advances in other areas of the industry, such as capital markets, is more prevalent. Why does securities services need to make moves in digitalization too? How are your needs and those of your clients different?
A. The move to a digital model has been a key driver in the work we have been doing across the bank. We are not looking just to ‘digitalize existing processes’ but rather move where possible to a true digital capability (ie. not just scraping a document passed to us and extracting a data fields but generating the data in a digital form at the outset and linking the content to an event driven solution). We will also see true STP across the entire ecosystem of actors in any financial transaction when the initial data is captured in a pure digital way and the data then triggering downstream actions as necessary. This way of thinking will provide much better efficiency in the markets and increased transparency for all involved but does take firms to start to think about the market and the role that they perform in a different way. The move to a distributed ledger within the Private Equity Blockchain product has allowed Northern Trust to deploy technology for upstream participants to digitally generate data, deploy that automatically to the distributed ledgers which in turn will allow a downstream actor to listen for relevant data, extract that information and perform a necessary function.
Q. What benefits does this move offer your client base?
Our first application of digital document functionality was in the private equity space, where we used it to generate a ‘Side Letter’ covering a specific set of investment types that an investor does not want the investment manager to purchase on their behalf, commonly called ‘opt outs’.
The digital side letter includes a smart contract representing the opt out. Upon uploading the document to the application the legally binding smart contract code is deployed from the digital agreement directly to Northern Trust’s Blockchain for private equity fund administration.
Benefits to our client base:
- Automating the administration associated with generating documents through the process to having them formally signed will provide process efficiencies, improve transparency and, importantly, increase the speed of execution for private equity funds.
Benefits to the different participants in the private equity fund lifecycle:
- Investment managers will see exactly where any legal document is in the generation process, allowing them to engage to ensure that the document is being looked at by the right firm. This will speed up the generation and execution of the process. A direct result of this improvement will be a reduced legal cost plus we expect a shorter time to process fund transactions.
- Northern Trust administration will see increased Straight-through Processing (STP). The deployment of the smart contracts will deploy code to the Northern Trust system so that we do not need to physically add this information to the internal systems. This helps reduce the risk of a legal binding clause being set up incorrectly which could cause an investment breach.
- The Limited Partner (the investors in the fund) will start to receive legal agreements in a digital system for them to review and sign. This is a more efficient process than via the current paper based delivery of legal documents.
- The funds’ auditors can see the smart contract on the ledger and can in-effect audit the legal requirement for the investor when the legal agreement was written plus they can also see via an event driven process that runs directly from the ledger in real time every time that smart contract is evoked, which speeds up the audit process so reducing costs to the investor in the process.
Q. What are you plans to expand the use of the technology and/or relationship with Avvoka to support other areas?
A. The deployment of the technology has been a success and we intend to expand the use of digital documentation generation solutions that will allow many participants to benefit from the development that Northern Trust is putting into this area. We expect continued expansion in the use of smart contracts to apply further digital legal terms to our Private Equity Blockchain application to support management of the fund lifecycle. We are also looking to broaden the use of our Blockchain solution so that the benefits of such a solution can be felt elsewhere within the industry.
Q. How is the recent news part of your larger digitalization strategy? How does this differentiate Northern Trust from competitors?
A. This development is part of a broader, long-term initiative to evolve our technology infrastructure from the foundations. At its heart is Northern Trust MatrixTM– an event-driven architecture – which, like the PE Blockchain, will enable a single, ‘golden source’ of data across the enterprise – enabling us to integrate new technologies more quickly, optimise our processes and empower clients and partners to do more. This is a carefully managed evolution with client service at its core and underpinned by our commitment to maximum protection.