Corporate Actions as a Team Sport

Join us for the latest DTCC Insights podcast, where the state of corporate actions is front and center.

Tim Lind, Managing Director, DTCC Data Services hosted Dan Doney, Managing Director, CTO, DTCC Digital Assets and Barnaby Nelson, CEO, Value Exchange to get unique insights from across the financial services landscape and share why it takes an entire industry to move corporate actions forward.

Key Takeaways:

• A Stagnant State: Despite technological advancements, the corporate actions industry has remained largely unchanged, leading to significant inefficiencies and costs. A major issue is the lack of accountability and communication between issuers, investors and portfolio managers.
• The Cost of Inefficiency: The current system's inefficiencies are estimated to cost the industry billions of dollars annually. The total cost of corporate action processing in the U.S. is estimated to be $169 billion per year.
• Digital Developments: Blockchain technology and smart contracts have the potential to improve the efficiency and transparency of corporate actions. However, the complexity of implementing these technologies and the need for alignment across various systems are highlighted.
• A Standard Approach: The industry needs to collaborate, with one possible solution deriving from a bridge between traditional finance and digital finance. Either way, standardized messaging protocols are a must, but several challenges exist.

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Transcript

Tim Lind

00:01 - 01:42

Hello, and welcome to this DTCC's Insights podcast. My name is Tim Lind.

I'm a Managing Director and Head of DTCC's Data Services. I'm delighted to be joined today by Barnaby Nelson from the Value Exchange and our own Dan Doney, the CTO of DTCC's Digital Assets business.

Today, we're going to explore the role of the central securities depository and the evolution of the current ecosystem over the past twenty five years. The current state of corporate actions industry and also the need for change.

The industry has remained largely unchanged despite advancements in technology. Lack of accountability and communication between issuers, investors and portfolio managers are significant issues and the root cause of many of these challenges.

We're going to highlight the cost of the current system, estimated by value exchange to literally be in billions of dollars and some of the underlying root cause of those challenges. We're going to shift towards the possibility of change, what's the case for change, an authentic conversation, a candid conversation on that change.

We're going to emphasize the need to reshape our industry beyond, our current paradigm and how technology ultimately is going to impact that and why the time is now. So Dan, I'm going to start with you.

Now I've got a lot of Dan's in my life, so I affectionately call you "Digital Dan". I hope you don't mind that.

I'll take it. You come from a very interesting background for someone who's in this seat, from a submarine to a digital asset guy.

Can you just give us a little bit of a background how you got here and some of your experiences with corporate actions?

Dan Doney

01:42 - 03:23

So my you're right to point to a varied background, maybe that's because of never being able to hold down a job or maybe because I found a lot of things interesting in one way or another. I did in fact start in submarines, went into the intelligence community and worked there in advanced research for almost a decade.

Those two experiences were quite formative. As a young submarine officer, you are thrown into situations where you have to make decisions on less than perfect information where there's billions of dollars of consequences and hundreds of lives if you make a mistake.

That's a great way to learn to make precise decisions with imprecise data where you have to act, whether you feel comfortable with it or not. That was formative.

Certainly, I was in an extraordinary situation in the intel community working at advanced research at the NSA on artificial intelligence, quantum computing, a number of topics that twenty years later are really at the forefront of everyone's thinking. That led to an opportunity to get exposed to blockchain as a technology And the rest is sort of history.

This is an extraordinary technology that changes the way we think about data altogether. That's going to be part of what we discuss later.

I was fascinated by blockchain and both the illicit things that were happening on blockchain networks, but an opportunity to actually turn that around and take the transparency and immutability of those ledgers, overlay compliance and identity and get the perfect financial system. So that's what led me ultimately to this destination.

So that's the short story. Alright.

Tim Lind

03:23 - 03:26

Thanks. Yeah.

You you believe in the blockchain. You're one of those believers.

Right?

Dan Doney

03:26 - 03:27

Very much so.

Tim Lind

03:27 - 03:29

Okay. We're gonna we're gonna come back and help.

Dan Doney

03:29 - 03:32

A purist, so it's not the solution to all problems.

Tim Lind

03:32 - 03:48

Okay. I know there's a little cult like thing with DLTs, so I'm trying to drink the Kool-Aid.

Alright. That's good.

I well, we're gonna get along fine. Your job is to convince us on how this is gonna this technology is gonna change the traditional finance process.

So okay. Well, I I have a lot of Dan's in my life.

I only have one Barney in my life.

Barnaby Nelson

03:48 - 03:49

Right.

Tim Lind

03:49 - 04:09

And Barney Nelson from the Value Exchange. I've been working a lot with, you know, DTCC and a lot of different and and market infrastructure at large.

I know you've been a practitioner, a banker, a market data person and now head of a research concern. Can you tell us a little bit about your background and how you got into asset servicing and corporate actions?

Barnaby Nelson

04:09 - 05:04

Yes. And look, I'm really here for the ride compared with Dan's story.

So I mean, mine's kind of more a Stockholm Syndrome case, I think, of starting out in, in market data. You know, one of the first things that I had to do was, was we had to build the one of the data providers ISO 15022 feed, which was four hours every Friday afternoon going field by field particular.

So to your point, hopefully what a journey we've come since then. But I think for me, I think the journey the consistent point of the journey has been the human side really, working in a couple of banks as a custodian, seeing this up close and personal seeing the cost of errors land on your desk every day trying to do something about this.

And most likely to your point in the research context starting to put numbers around why this is such an urgent case for change and what we really need to be doing about this right now.

Tim Lind

05:04 - 05:41

Let's start with that then, Barney. When I looked at some previous research of Value Exchange and reached out to you last year, I thought maybe we were underselling the true costs of these various interactions between players in the, in the in the corporate action communication process.

And then you conducted a a bit of research where you really pulled that apart and came up with some truly appalling numbers. And can you give a little background about the research that you had done and how expensive these interactions, how many interactions there are involved in this process?

Barnaby Nelson

05:41 - 05:46

Absolutely. Hopefully, they weren't appalling in their quality, but The quality.

Tim Lind

05:46 - 05:47

is size.

Barnaby Nelson

05:47 - 07:33

Absolutely. So I think there's a few things.

If you think back to I think and I've really enjoyed this kind of quantification work because, ultimately, when we talk about, you know, how many people do we think touch a call production in the first question, most people start with should we say 10, should we say 20 kind of thing. And as we were talking about when we first started this, we're talking we very quickly go from tens to thousands to actually the number ends up being over a million people touching an individual call production.

So in that context, the efficiency, the friction around data flows is pretty much the absolute kind of primary concern. Where you end up with is that $37 million is the cost of a single corporate action in The U.

S. Compound that across the industry the total cost of the industry of corporate action processing every year we think is $169 billion which is 0.

1% of the market cap of The U. S.

So it's I mean they're big numbers. They're substantiated.

I firmly believe in them. And we've actually had to kind of rework them a few times just to make sure we're in the right ballpark.

But what we're talking about here is an astronomical challenge. And the only thing I'd add into that to your opening comments is the fact that the sad thing is we're not actually still in the same place that we were thirty years ago because actually things are getting worse.

And actually our research from last year showed that core production automation rates have actually gone down in the last year. So the I think the trap is to fall in the trap is for us to think that actually we're on a kind of flat line.

The truth is actually we're going backwards. And so making the kind of case for urgent change really, really quite apparent.

Tim Lind

07:33 - 08:43

Yeah. I I mean, perhaps the only operational process in capital markets that is going backwards, you know, given the levels of automation that we've enjoyed in transaction processing.

And to the root cause of that, and maybe it is the fragmentation of these various actors in the chain between an issuer, their agent, different types of transfer agencies. To us is the depository.

We have more than 200 settlement members. we have thousands of issuers presenting tens of thousands of events.

We're normalizing that data as the depository. We affect the distribution of billions of dollars of capital where the money flows through DTCC.

We present it to 200 or so different settlement members, them on behalf of 10,000 underlying banks or intermediaries. So the level of intermediation between issuer, agent, depository, settlement member, sub custodian, asset manager, beneficial owner can be seven layers of integration.

Barnaby Nelson

08:43 - 08:44

Yeah.

Tim Lind

08:44 - 09:01

And it's perhaps one of the challenges that each layer, they might know the layer above them where they get information and who they communicate to. But do they all understand where they sit in the chain and the whole process at large? Yeah.

Is that is that one of the challenges we're I think.

Barnaby Nelson

09:01 - 10:01

it's exactly right. I mean, I think so so statistically, we reckon there's somewhere between depending on the beneficial owner, whether it's a retail investor, wealth manager, institutional fund, ETF and so on and so forth.

There's somewhere between ten and fifteen organizations in the step, each of whom we reckon touch core production about 10 to 12 times. So to your point, if you scale that out, do all of those people understand what's going on around them? For me the great challenge about the manufacturing process of this is the huge variety because as you said you have an issuer who essentially wants to manage their capital full stop.

They're being advised by an investment bank who is basically trying to minimize their balance sheet commitments, who is trying to do something raise capital quickly effectively and innovatively if that's a word. And so so basically trying almost deliberately trying to break the mold each time because they're trying to do something a little bit more more funkily than than before.

Funkily? Funkily. And then.

Tim Lind

10:01 - 10:03

but that's definitely not a word.

Dan Doney

10:03 - 10:04

I like it!

Barnaby Nelson

10:04 - 11:24

I took liberty on it inevitably and I thought let's stretch it to funkliy. Watch out for more.

But I think you then have transfer agents who obviously have to book the stuff, create the event, pass it out. They have a obviously their bills are being paid by the issuer.

So therefore they need to obviously to follow that. But they have concerns and objectives around scale, around basically making sure that the thing works from a capital perspective.

And then that passes through to the CSD which passes down to a custodian or depository participant omnibus account in most markets whose only objective is basically is to hold everything together in one place get as much netting as you possibly can and completely get fly in the face of everything that is beneficial ownership recognition. And then all that consolidates down through trustee structures and so on and so forth into a person managing a portfolio whether it be an institutional fund manager or a wealth manager who is trying to make sense of all the different messages they've heard from everyone else.

And so exactly to your point you've got even in that example you've got four or five steps where the interests basically pay objectives are entirely different and therefore very, very little kind of pull towards any kind of sense of common objective.

Tim Lind

11:24 - 11:46

And the incentive for I mean as the investment banker guides an issuer towards any event, are they at all empathetic about creating common interpretations using simple language? Are they are they empathetic downstream how operations and banks and asset managers are going to deal with this? I mean, but that's the disconnect?

Barnaby Nelson

11:46 - 12:06

I think that it I'd probably say on a scale that it's direction as much as they're more aware than they have been. But I think the truth is that realistically an issuer is primarily concerned about how a corporate action election is going to go or a proxy meeting is going to go and they want to be able to speak with the beneficial owner who's making that call.

Tim Lind

12:06 - 12:06

Yes.

Barnaby Nelson

12:06 - 13:01

So primarily that in a corporate action based on our research the main objective of an issuer is to know who the beneficial owner is to get information from them as quickly as possible so it's not all eleventh hour and that it is basically and they're able to engage with that person in order to be able to kind of canvass and discuss and so on and so forth. That is totally different from the objectives of, for example, the bank or the CSD or the kind of financial institutions on the back end.

And so I think there is a growing awareness that the ratio that we see is basically as it costs issuers collectively in The States about 167,000,000 a year to issue corporate actions. As I said if it's $169,000,000,000 to receive them you've got about 1,000 time difference there.

I don't think there's an awareness of the quantum of that difference between issuers and financial institutions.

Tim Lind

13:01 - 13:38

And therein lies our challenge. How do we make people aware of the extraordinary cost that we've come to live with? I grew up at Brown Brothers Herriman thirty years ago.

I dare say to your point about lack of progress or even slippage, the person who has my job now still has the same challenges fundamentally that I did thirty years ago. And I know, Dan, from prior conversations, you've also had experience in how debt issuers distribute information to their bondholders and distribute principal along with interest or just originate debt.

Can you share some of those experiences in that level of fragmentation?

Dan Doney

13:38 - 16:22

It's important to understand that. I'm going to speak a little bit to the blockchain community so they can understand this problem in particular.

A corporate action is at the highest level. It's the relationship between a company and its shareholders.

And there's a sequence of events that occur that are common. We track 60 basic categories of corporate action.

So the complexity of this is quite large, but you can understand this dividend distribution from a company to its shareholders requires all parties to agree on the exact ownership state at a point in time for to properly distribute that dividend. That sounds easy, but what that means is a thousand systems must all agree at a point in time as to who the proper owner is.

That means a thousand systems have to have tight coupling, tight integration. And to know at a specific point in time ownership is an extraordinary problem from a computer science perspective.

That's why we have T+1, so that at least overnight all systems can agree on that ownership stake. But we want to get to T0.

We want to get to real time understanding. And so people should understand the enormity of this challenge.

We can speak of dividend distribution. Certainly, people can understand that.

Shareholder voting, people can understand that. Tax withholding, it starts to amplify as you go overseas, etcetera.

This is a complex set of systems, more complex frankly, I must say than any blockchain system has attacked to date. But there's another problem.

Let someone say, well, blockchain is going to solve all that because you'll get a universal record of ownership. That assumes that there's only one blockchain.

There isn't only one blockchain. There never will be only one blockchain, and there's always going to be or likely to be traditional systems as well.

Well, all of those systems must agree. Well, frankly, this is what the role of a central securities depository is in the end.

The central securities depositories are the consensus model for their respective markets. So when you want to know ground truth ownership as a starting point of all of the shares of, take your favorite equity, let's say, Apple, the Central Securities Depository is going to have the core record, the record on which all other records must agree, and then each individual participant is going to have a derived record from this.

So you start there. But recognize each one of these systems all the way out must also represent that same ground truth, and that's the real challenge, even more so when interests aren't aligned as as you pointed to.

Each party is not interested in fixing the other party's system. In fact, they're interested in minimizing their own costs and this is why this problem persists.

I wish I'm hopeful.

Barnaby Nelson

16:22 - 17:04

actually, if I may, just to make it even a little bit more glum, glumily, It's, you know, the additional two complexities is you've got one is securities on loan and everything that is OTC that sits outside. When a stock is loaned out on from a prime broker, I mean, heaven help anyone at CSD trying to work out where on earth that security ownership really lies at the moment of election.

And second of all, there's some people just don't want to be identified. A lot of the sovereign wealth funds in the world would absolutely never want anyone to be able to see who their stocks are owned by or sorry, who their stocks, the ownership structure is.

And so as you said, it's very complicated and there's multi dimensions of challenge in here.

Tim Lind

17:04 - 17:39

And Dan, you made an interesting point about shorting the settlement cycle. One of the primary challenges of corporate action is, you know, bond holding and shareholding has its privileges, and those privileges are my entitlement to participate in any distribution that that shareholder or bondholder of record on that at that point in time Exactly.

Is eligible for. And the more we're in limbo between a trade and a settlement and clarity of ownership, the more we don't know what and who is deserving of that entitlement, the seller or the new buyer.

So that how to settlement change had a big impact here.

Dan Doney

17:39 - 18:14

That's a big important so my son's two shares of Apple. He's entitled to the rights that are afforded by this.

That's right. And so if we make mistakes along the way, if parties don't agree, and his tiny little rights or some large sovereign funds, large rights, with respect to their share ownership get mistaken, that's a problem.

The system must agree all the way out to the edge, in in terms of these general rights. That's our responsibility.

Now we're speaking to the glum side of this. Yeah.

But in fact, there's hope.

Barnaby Nelson

18:14 - 19:10

Yeah. And if I may just to add on as well, but I think for me what's really, really dynamic about this is that ultimately, exactly to your point, the issuer and the investor, there is less and less tolerance for everything that's going on at the moment.

Because ultimately if you are an individual investor twenty something let's say that you want as you said to exercise your rights you expect your digital online brokerage platform to be able to do it. And why on earth wouldn't you? You go to the other end of the scale.

You've got pension funds who are actually being audited by their regulators right now saying I want to see your voting record. Why did you not exercise your vote on this specific case when you're a substantial shareholder or just a shareholder? So for me there is a huge amount of demand side change to say, look, we have to get something done here because I cannot miss out on my votes.

I cannot underrepresent myself because frankly that just doesn't cut it anymore in front of my regulator. Yes.

Tim Lind

19:10 - 20:21

And again, you're hitting at the root of the problem. We have an issuer at the top of the chain and an investor at the bottom of the chain, six or seven levels of intermediation between these two parties.

But ultimately, the investor wants to understand the behavior of the issuer. The issuer wants to understand the sentiment of the investor.

And Dan, your point about the role of the CSD, that's why we're having this conversation. We're the single linchpin between an issuer and investor.

We're the original digitization of that information that starts its life as a PDF or prospectus. We digitize that record and we start that process going.

So we think that central role, we've got if there's a case for change, the CSDs have to be of the world need to grasp this opportunity and connect the various parties. That kind of comes back to the whole blockchain vision.

It was about transparency and understanding for the public to see where the state of a transaction or ownership occurs. Is that part of the reason you got interested in corporate actions of DLT?

Dan Doney

20:21 - 21:31

So we ultimately need to solve this problem as a CSD. Now there are many parties out there and in fact some of the leaders of financial institutions who say the days of CSDs are numbered.

Nothing could be further from the truth in the end. Let's just take a simple case.

Let's say there's two big blockchains out there that are that the world has totally changed, there's no more traditional systems, everything's block chain, but but there's more than one blockchain. And we know that that will be the capacity.

You can't handle all transactions in the market unless there's more than one blockchain. So let's say there's two.

Someone is responsible for determining at a point in time for both of those blockchains who is the owner. And when all of the value is caught up in complex agreements and lending protocols on those blockchains, someone still needs to make the determination who's the rightful owner in order to distribute this.

That's someone who's seeing across chains is really what a CSD already does. It's seeing across data systems in order to make that true.

So we're we're central to the to the present problems solution and to the future problems solution as well.

Tim Lind

21:31 - 21:39

And we're confident about the fact that DLT is not going to put the depositories out of business anytime soon. Although there have been suggestions such that.

Dan Doney

21:39 - 21:47

Well, look, if depository don't adapt to this new technology, then in fact they will be out of business. Make no mistake about it.

But this depository is very interested in the future.

Tim Lind

21:47 - 21:53

Yes. It's a great point.

Hence, your existence here is that vision that when thing or.

Dan Doney

21:53 - 21:57

how That's my pleasant personality that they.

Tim Lind

21:57 - 23:02

love. We keep your enemies closer, I think is the theme.

But we're also reminded that for an industry that relies heavily on the fax machine as an integral piece of communication, I think we'd be jumping the gun a little bit to suggest that digital assets will obviate the need for central record keeping central authorities. But we try to address this problem.

I do want to we're going to come back to the smart contracts and how we use digital asset technologies to aid the traditional finance world. But we try to do this, Barney.

I know you've been involved in standardized messaging. You mentioned ISO, things like 15022.

DTCC is the leading expert, I would argue, in 20022 and invested more time and treasure in automating the communication of standardized corporate action messaging. But automation in the ISO world has limitations.

Can you describe some of the limitations of why hasn't standards? We all want standards. Why haven't standards in terms of messaging protocols addressed this fragmentation and expense?

Barnaby Nelson

23:02 - 23:06

Yes. Absolutely.

And I mean, so I think there's a.

Tim Lind

23:06 - 23:08

few things really for me.

Barnaby Nelson

23:08 - 24:22

One of the things is ultimately if you if based on everything we've said the starting point is a bunch of people with very divergent interests and to be completely honest a lot of fear and loathing Across the point, saying CSDs are the natural owner for this, I can think of five types of organization who vehemently disagree with that. But ultimately the key thing is that everyone needs to come to the table.

And we I think what we the first step of all of this is a much better understanding of everyone's agendas from the issuer all the way through. And I think so I think for me first point is basically why our standards not worked because the right people haven't been around the table including the issuer of the investment banks so on and so forth tends to historically have been a CSD to custodian conversation.

So that's one. I think the second thing is if you look at some really great initiatives around the world about standardization of messaging using 1522 and all this kind of thing, You go to people can spend a lot of money rolling this thing out and then suddenly they turn around to the biggest depository participant.

The depository participant says, yeah, can you make it look like the old one? Yeah. Because I don't want a half million dollar tech spend to basically to have to suddenly reintegrate this.

And so this is one of the challenges. It's not just the abstract of a standard, it's which standard.

Dan Doney

24:22 - 24:23

Yes.

Barnaby Nelson

24:23 - 26:00

And then you have the whole questions of even if you take the phenomenal amount of man hours that's gone into ISO fifteen twenty two and ISO twenty twenty two, how many SMPG working groups are there around the world that have come up with their own versions of that? The market practice groups. The market practice groups.

Yes. Multiply that, for example, in Europe when you have the shareholder rights directive when every single country was allowed to create its own variance, its own legal interpretations or regulatory interpretations of that in their local country law.

The discipline it takes to have a standard is just immense and there's too much centrifugal force I think to be able to create something that is just a widget. And so I think for me that those are all the reasons why not.

I think on the positive side where people have created standardized messages there is an incredible upside. And we I think everything we're saying so far it makes it sound like basically there's no progress being made at all.

But actually if you look around the world some of the markets that have created good standards have really delivered some substantial efficiencies, 80%, ninety % upticks in kind of levels of automation, radical reductions in callback volumes, in error rates, that kind of thing. So I think there is potential for progress.

But I don't think that any one solution is necessarily going to be you can't just deploy one technology or one standard. It ends up being a patchwork quilt that spans all the issues all the problems that an investor has all the way through to all the problems that the investor will have.

Tim Lind

26:00 - 27:37

Indeed. Now obviously, we're the as the CSD, the first party that standardizes this information.

I think most of the CSDs of the world have embraced ISO messaging standards with their participants. But the further you go down the chain to the investor, the lack of consistent messaging standards we'll find.

If you're an asset manager with a holding large holding across a lot of different funds that might have a lot of different custodial agents holding those securities, for a single event, you may receive 20 different announcements That looks slightly different as interpret you mentioned those slight interpretations as it as this information flows down. So at the end of the day, the asset manager has no recourse but to reconcile all of the information they're receiving from their various agents.

And the perversity of this whole process is that record started its life as a single document, a single digitized record of the CSD and was broken into a million pieces only to have the asset manager try to put Humpty Dumpty back together again. Maybe the task before us, how do we move Humpty Dumpty through these various systems and chains and some of the fragmentation, Dan, that you were describing to the investor somewhat intact, right? And how do we rethink that process? But, Dan, I don't know if you had any comments on that kind of fragmentation and maybe how modern technologies like digital asset or more specifically small contracts might play a role in reducing this interpretation.

Can you comment?

Dan Doney

27:37 - 31:39

Well, this was the dream of Tim Berners Lee, the founder of the, not that many claim the founder of Internet as we know it. His vision was the semantic web and it wasn't the way the Internet actually evolved as we understand it.

It really was that all objects across all systems had a way of describing themselves in a consistent way. That was what the vision was.

As it turns out, it devolved to that we would all have a mechanism by which messages can be routed. And we never actually got to the original vision, which was the semantic web.

And what we're talking about here is a challenge of semantics, understanding meaning across all of these systems in a consistent way. Well, guess what, there's a new opportunity.

It's actually a radical new opportunity based on some of the new technologies to actually achieve that original vision. So let's blockchain is a piece, but not the only piece of of this puzzle.

So let's talk about why there's hope with blockchain. What's new that it introduces? Most people know it as being a mechanism universally that allows me to move value and understand the movement of value.

It does that by having a very specific action, the signing of a transaction by a wallet that can only be done by that party in order to execute movement of value. That's interesting, but not the most game changing piece.

The fact that I can understand now who caused the piece of data to change. This is the concept of provenance.

Who applied this meaning? In what context was that meaning applied? That is the radical transformation here. Blockchain is a trustless system, a zero trust system is another way of saying it.

That is there is no system administrator on blockchain networks. That's both intimidating and exciting in the end.

I can build a data system. I can build a database where I can know exactly who described what row and column in that database and under what form of meaning that they make that description.

I can introduce over that standard ways of describing the meaning and I can know who set that definition and then who set the value associated with it. So I have provenance of all the way back to the core, who said and why.

But the fact that we the problem with standards isn't the standards themselves, it's the implementation of the standards that's a problem. Take for example, maybe I have a column in ISO two twenty two that is asset type.

And one party who works in equities considers all that fixed income stuff, that's just fixed income to me. But if you're a fixed income specialist, it matters.

Is it annuity? Is principal work maturing? What type of this is it? Now if you're representing those things in your system and you don't care about all that, you call it fixed income. But that's going to cause a breakage in this other party system where they actually need to know the specific distinctions.

But if you don't have a mechanism to enforce those rules when the data goes in, bad data in means bad data out. But now what we're introducing to blockchain networks in a data framework is the ability to actually describe things in a consistent way such that standards can be enforced upfront and implemented in a consistent way.

Now we have a whole different substrate to work from for corporate actions. Now we can actually know that the issuer attested this or that the CSD posited that this is true and the issuer confirmed it as it then goes out to the shareholders.

We can see that confirmation along the way and we can understand the provenance of data, but we can understand that it has common meaning and then automate the actions corporate actions based on that. That's a radically different world.

It fundamentally, I believe, has the potential to address the costs that you were referring to, Darnie.

Barnaby Nelson

31:39 - 32:34

Yes, absolutely. And I think the only thing I'd add, if I may, is also just on top of that.

If you then have auditable programming rules, basically smart contracts to say, okay. Well, if if Custodian one basically receives a certain type of event and processes it this way using a smart contract, and then it will go downstream in the in the following way, The ability for an investor to turn around to Custodian one and say right I want to see your programming rules for that smart contract versus this this custodian versus that custodian.

The due diligence on those smart contracts becomes actually part of the whole investor custodian relationship which then drives standardization because, you know, a major institution investor can turn around and say, look, you're doing this differently from the other three. It's causing a break every time your smart contract triggers this as being blue not red or whatever it is.

Therefore, we need you to change it. So I think as you said it puts us on a very different path.

Dan Doney

32:34 - 33:40

So that first it makes the regulator's life easier because you have that verifiability. You don't have to look at 1,000 different systems and the way that they implement each on their own.

The way we like to say this is instead of the asset being in 1,000 systems, now the system is in the asset. What that means is the smart contract can be programmed with the logic of the asset itself.

And now you confirm it once, and it's executed consistently across all of the different participants, the holders, the wallets that are out there. But that makes it much more observable, much more consistent, and the opportunity to finally automate this this challenging problem once and for all is at hand.

But make no mistake, this is an enormous set of tasks. The the variability, the number of edge cases in corporate actions, there's so many.

Did this foreign investor elect for their tax withholding to be done in this particular way and so on? Those all have to be programmed into these smart contracts. And frankly, a lot of smart contracting language is too limited to be able to handle all of those cases.

So that's another part of the challenge as we move forward.

Barnaby Nelson

33:40 - 34:25

Yeah. And I think, you know, for me the the, you know, the challenge we face right now is actually is that it's a bit like a doughnut.

The absolute the middle of it, dividends, simple stuff, nobody has a business case for changing that stuff at the moment because it works to a 99 x percent efficiency. So realistically, the high volume things, it's all of the fringe cases that are the problem.

And so therefore, it's very hard to get scale out of anything because ultimately there is no one thing that gets you 90% of the way and then you do the last 10%. The 90% is not even part of this.

It's the 10 we're only focused here on the 10% and that's where and it's in it's just it's every one step at a time, every one of those rules, how do we crack that, move on to the next, how do we crack that. So it's it's a long journey.

Yeah.

Tim Lind

34:25 - 34:31

I'd say it's heartwarming to see traditional finance and digital finance getting along so well. It gives us hope for the future.

Dan Doney

34:31 - 34:33

We followed up before we said that. Yeah.

Barnaby Nelson

34:33 - 34:35

The makeup holds a lot of black eyes.

Tim Lind

34:35 - 34:39

and cuts and bruises. Underneath the camera, you get a lot of That's funny.

I always had to.

Barnaby Nelson

34:39 - 34:45

classify myself as being traditional finance. But I think the main thing is that there's, yes, there's a lot of hope, I think.

Tim Lind

34:45 - 35:58

I think in this particular discussion, you represent traditional finance. But Dan, you mentioned the challenge of semantics, which is really, I think, at the heart of the matter.

You mentioned provenance, a great word from the French word provener, meaning where the hell did that come from. Right? So the the getting it right up front, understanding the interpretation lineage of semantics, as you say, provenance, as that's passed downstream, we still need to deal with the reality of legacy systems, accounting systems, all the transactional systems that have been constructed in eras gone by and work.

I'm still trying to understand how we bridge the gap of we can get the information right so we can create a collaborative, integrated network of information. And it still hits a wall at the legacy transactional systems.

Is there do you have any comment, either one of you, on how are we going to bridge the gap and recognize the reality of legacy?

Barnaby Nelson

35:58 - 38:06

I mean I think for me one of the things that's really great cause for optimism is I think if you look at how people are dealing with legacy technology as a whole at the moment, it is separation of data from platform. So coming into, I'd say, the last decade, generally speaking all the processing was done by the same system that held all the data, so the core banking system, core processing system.

Now I think there's been a recognition that the two need to be separated out and that the key to basically to modernization is essentially is having the data processing happen in one place and then the treatment of that data as in the actioning of that data happening separately. I think that's a great step because then that puts our ability to control the data in a much, much more kind of self defining self kind of we've got control over that now.

And I think that's the first step because ultimately really what we're talking about here is data. And I think the idea of our ability to manage data being locked into a system that may be celebrating its fiftieth anniversary is probably a bit pie in the sky.

Now we're talking about even before we get to DLT and blockchains, we're talking about just snowflakes and frankly anything that is basically a big database cloud all that kind of stuff. There's a lot more flexibility there.

So I think for me step one is basically is we're on the journey. But I still think the challenge is that the solution that we've got to build for here as I said is it's got to do one, give complete visibility between the issuer and the investor of who's who two, give complete flexibility to the investment bank about what they're going to cook up next And three is it's got to be able to actually give all the netting benefits and all the operational benefits of a single omnibus account.

How you do those things? At the moment it's, to use your French. It's it's a castette.

You know, it's it's like it it breaks it, you know, literally, it's like a riddle that can't be solved. But I think, you know, the way you describe is you said the journey that we can go on.

For me, the path is there. We just need to be able to the technical path is there.

The key is getting the right people around the table to actually to define it and action it.

Dan Doney

38:06 - 38:09

Look if you're expecting any French from me that's not going to happen here.

Tim Lind

38:09 - 38:14

That's not very much. So.

Dan Doney

38:14 - 40:50

look I think in some ways Blockchain is moving in the opposite direction. It's actually moving the data to the object, to the processing engine in in many ways.

And here's the interesting reason why that's true. Sometimes the movement of value is actually governed by the data about that asset.

We just did a big experiment with collateral. The movement of collateral in and out of an agreement is dependent on the characteristics of that asset and the aggregate characteristics of the assets that are in that pool.

That requires me to, as part of the transaction, understand the nature of the objects that are moving. So we see these things coming together in important ways, but you're right, it doesn't necessarily mean that they're all together in one place to be able to handle scale.

One aspect the way we see the problem traditional system to distributed ledger is the same problem as one distributed ledger to another. That is that you have to bridge meaning between these networks.

And so you have to have a mechanism by which you can represent meaning in any one of these systems and understand that you have common meaning. So the same problems that we face in the future world of many blockchain systems that all need to agree on meaning at a point in time is the same as I have a traditional system and a distributor ledger, and we need to agree on me.

So the good news is we're solving this problem. It is important.

One of the problems in the blockchain world is they've seen themselves as being completely separate and they have disdain for traditional systems. What that means is people have a choice.

You can move out to the island, the Galapagos Island of the world and be isolated from everything else, have your value there and it might be wonderful for you, but it's a very small part of all the value that exists. And oftentimes, it's not the high quality stuff.

So go ahead and go there and you'll see some interesting creatures while you're out there, but you're not coming back. What we believe is that these need to be brought together into a consistent system both where you can move your value to and from.

So we want to build a thick bridge between these worlds. And what that means, a lot of that centers around these deep corporate processes that dominate the back end of true finance.

Those have to be brought into the blockchain world. So we're working on that.

But but recognize, this is not a small this isn't some tiny start up somewhere mapping all six, you know, all 6,000 edge cases associated with corporate actions. It takes serious players working together to bring all this into the mix so that value, as we know it, can move freely between these systems.

Barnaby Nelson

40:50 - 41:49

Yeah. And I I for me, I think I couldn't agree more because I think for me somebody said last week that this is a journey of years and decades of one product, one use case, one step at a time.

So I think we've got to particularly as an industry I think we've got to get away from the idea that there's going to be some silver bullet that suddenly we are going to just it's going to fix everything because I think that the tendency of that thinking is to wait for that and then see everyone else use it and then they'll leap in. But ultimately really the answer is one use case at a time incremental progress in an acknowledgment that it is years but ultimately that as you said you're building towards foundational infrastructure.

And I think that for me is a very different game plan from what we've been talking about. Because I think the truth is that in ten years' time if we don't manage our perceptions right we will still be sitting here saying so it was forty years now it's fifty years that we've done nothing.

Truth is there is a lot of progress being made.

Dan Doney

41:49 - 42:33

This is a case for open innovation because frankly, no one entity, whether it's DTCC, DTCC and a collection of other CSDs, or other institutions is going to be able to solve this problem in short order unless we put the problem out there to the clever technologists around the world in open innovation. And you would be surprised under that scenario how quickly these edge cases can be can be addressed.

And this is what we're doing with Launchpad ultimately. We wanna put the challenge out there.

We're gonna do some exciting things, build onto this framework so that we can move quickly into this new world and at investment levels that are reasonable. No one can throw all the resources at this problem that are necessary to solve it all for everyone.

Tim Lind

42:33 - 42:53

Yes. But you're wonderfully pragmatic.

I'll give you that. And you expressed some of the attitude that I see being a more, say, a traditional finance person.

This is kind of open disdain for the existence of current technologies. And this whole rip and replace kind of attitude, I can't imagine it given the investment.

It's foolish.

Dan Doney

42:53 - 43:19

They have no understanding whatsoever of the responsibilities that financial institutions have to safeguard financial networks. And it's frankly a little bit frustrating from my side.

And to be honest with you, there was a lot that I didn't know about the process when we were introduced to this environment. There is a reason why things are the way they are.

Be respectful of those reasons. And now let's work to automate and get to the better world.

Tim Lind

43:19 - 43:51

That's it. And the road to adoption of tokenizing digital assets is through a bridge with traditional finance and perhaps at the edge is solving issues we couldn't in traditional finance and then growing in relevance and adoption.

So that's why I think the vision that you have and the acknowledgment of legacy is going to be an important part of this journey, Dan. And I was surprised that you know as much, as a digital asset guy with your background knows, about corporate action.

I thought you're kind of a unicorn that way. And maybe that helps you be pragmatic.

Dan Doney

43:51 - 43:54

I did it at Holiday Inn Express, I guess. Yes.

I.

Tim Lind

43:54 - 44:48

don't know corporate actions, but yes, good luck with that. Barney, and to some of Dan's commentary, coming from the banking world, I'll ask you to represent the asset servicing industry at large, the Santa Charter guy right here.

Where do you think banks are having initiatives in digital assets. They're becoming familiar with the technology, its application.

Where do you think banks are mentally in really addressing, like I said, thirty years since I've been in the space, pretty much the same, a little very, very similar? Have banks just had enough with the existing process that they're really going to invest in not just more messages and automation, but to rethink the whole process fundamentally.

Barnaby Nelson

44:48 - 47:30

So I'm at the risk of being very glum, speaking glumly. I think that if you look at the last ten years all of the major change impacts that we've had on the industry in various manifestations regulatory change like SFTR even MiFID even things like T plus one things that are meant to rewrite the script and trigger that kind of fundamental reevaluation and the opportunity of blockchain.

The exactly as you said Ann, the fundamental thing that we have to take away from all of it is that there is an an immense pressure to snap back to the way that we do things today and to be incremental. Because today you have control frameworks, you have project processes that have been signed off and evaluated by risk committees at 100 levels.

There is so much reason not to change the fundamentals and to rewrite the blueprint, that ultimately everything ends up having to be just a stretch away from the current. And so the idea that we're ever going to just basically fundamentally rewrite is really, really, really hard.

Now it's not to say that we can't because I think there are certain areas. And I think the collateral digital collateral space is a classic one where the business case for that is so incredibly compelling that ultimately people really need to see that and people are immediately buying into or immediately after several years buying into the fact that we just have to get on with this.

Yes. But at the end of the day people are not throwing everything out.

They're not throwing their triparties out. They're not throwing all of their existing things out and saying right we're going to start again.

They're saying hang on look this leg we can actually do something better. This bit we can do something better.

And so I think for me it's much more about weaving the new technology opportunities into the foundations of our infrastructures on a case by case basis where it makes sense. And ultimately what I think banks are being much better about now is being directional in how they do that.

So each year has to stand up with its own ROI. Each investment project has to deliver on its own.

So you can't just you can't anymore say I'm going to spend $50,000,000 on the blockchain because people just turn around and say well okay when are we ever going to see that back? But from a banking perspective you can say right we are going to tokenize this bit of collateral. That's going to give us a lot of expertise and experience about this kind of stuff.

So once we've got that and the risk committees and everyone understands that, let's look at something. Let's look at extending that.

Let's look at bringing in another asset class into that and so on and so forth. So I think for me the optimism is that basically we are more directional than we have.

But make no mistakes, we're still very incremental in the way we make progress.

Tim Lind

47:30 - 48:43

Well, one reality I think we have to recognize over the last twenty years in an industry that's predominantly fee based, yes, based on the value of assets under custody, assets under management, we've seen this grandiose race to the bottom in terms of competition on fees, lowering fees. And where we hit our once we get to the bottom, well, congratulations, we all won.

We're all on the bottom. How do we get off the bottom? We've outsourced everything we could.

We've created automated mechanisms to the extent that we could and optical character recognition and other ways to read documents that we've made incremental progress. But I think we're bumping up against the fundamental principles of what you're talking about in this fragmentation.

And how do we make meaningful change in our cost structure? And I just I wonder, and Dan, I'd ask you in your engagement with banks, like how do we get off the bottom? How do we stop thinking about competing on fees and start competing on value or at least deal with some of the fundamental cost structures that are the millstone around our necks, so to speak. How do we liberate ourselves and deal with that legacy, the reality that Barney's the glumley is really taking a lot.

Dan Doney

48:43 - 48:44

And then he's.

Tim Lind

48:44 - 48:57

Fungally and glumly, we're going to get a thesaurus out here. But anyway, how do we in your engagement with bankers, are they mentally ready to start to deal with some of these fundamental realities?

Dan Doney

48:57 - 50:52

I share Barney's funkily, glumly view on this. This is a fundamental problem in investment banking as I see it and what I've encountered.

There's the top end front facing, front office activities where ultimately the revenue generators are. The cost drivers are the middle and back office for financial institutions.

But there's not really an appetite or an understanding of the kinds of core challenges that exist there with a determined effort over the long haul to address those core challenges. And what you see in corporate action is a classic case.

No one that's not driving top line revenues, but it is driving the cost. And what's more are the services that can be offered.

So it becomes the limiting factor. As we said, it's really one of the driving reasons why you can't get from t1 to t0 until this problem gets addressed, in a general manner.

But that requires really discipline in investing in an approach on this, which is why, in my view, we can't afford the long ten year build. We have to go to open innovation models so that we can accelerate this process because we are financial markets are an ecosystem.

It requires more than one participant to actually get to the end state. But this is why I think why we are focused on the collateral model.

Like you said, the top line benefits to banks in terms of financial mobility, better execution of a bank's balance sheet, never are they more apparent than in collateral management. And collateral management in the end is heavily driven by data efficiency.

And so that's becoming a very tight driver of the kinds of work that ultimately allows us to automate other things like corporate actions. So we've seen that as the place where we can actually make the compelling case straight upfront to justify the investment on these other factors, which ultimately are going to get us to the nirvana that we're seeking.

Tim Lind

50:52 - 51:50

This is another my favorite French expression, not only Barney is a French speaker, by the way, Hope gives life. Hope creates life.

Hope is the most powerful, perhaps, emotion in the human portfolio. And you had some hopeful words there.

And you're drawing a distinction between front office, which we generally consider adversarial zero sum game, I get a better price than you, whereas in a back office, and what you're talking about is a more collegial, collaborative. We see a lot of operations, people here at DTCC from different banks.

They're all friends with each other. They know each other.

Either they worked together at a previous bank, but they interact with each other. So there is a more of a spirit of of collaboration and recognition your part in the ecosystem, yes? So we trade alone, we settle together perhaps.

So I thought that was a very hopeful comment. The question.

Dan Doney

51:50 - 52:20

is driving that collaborative nature. So blockchain is only a useful technology in a collaborative sense.

Frankly, if you aren't working in a in an ecosystem, traditional data technologies are better whenever it's just a couple small parties. Blockchain thrives when it's many.

So in many ways, it's driving the kind of collaboration that's needed to actually fist fix this problem. Now just by the way, I only make jokes in Solidity and c sharp, so I don't know French.

Of course. And so, you know, that's my other language.

Yeah.

Tim Lind

52:20 - 52:23

No. I'll I'll admit that's on that one, Bonnie.

The translator is she.

Barnaby Nelson

52:23 - 52:27

said, I put you as a musician. And I was like, what? Anyway, yeah.

Dan Doney

52:27 - 52:28

Maybe not too.

Barnaby Nelson

52:28 - 53:47

But I mean, I if I I think for me what to your point about kind of what is cause for optimism, I think fundamentally, corporate actions are a human problem at their base. They are a question as we said of lack of understanding, lack of alignment of objectives and ultimately as I said divergent operating models.

What is fantastic in the last ten years thereabouts is the enormous uptick in collaboration across the industry. You have so many examples out there of organizations coming together to fix problems to discuss problems in a way that there's a very, very clear line now that there didn't used to be about what is competitive differentiation versus what is not.

And if you look around the industry the amount of collaboration on non directly competitive issues is fantastic. So I think what is really great is that you put the two together.

If the core issue is lack of understanding, mutual understanding and lack of alignment on operating models and the core development is more talking, more conversation, more understanding, one plus one equals hopefully great grounds for I think for the first time in a long time a profound understanding of really what the problem statements are that we can then go on to build around. But I think for me that's the chain that is happening right now with a great degree of urgency.

Tim Lind

53:47 - 54:20

To that point, Barney, if we recognize that fees are unlikely to be increasing anytime soon, right? Prices, at least in our we don't see a lot of inflation in fee based pricing models, that the only way to maintain margins or improve margins is on the cost side of the equation and recognizing that reality. How do we do you believe investors and maybe asset managers who act as their proxy, do they care enough? Do they see enough of this problem? Yes.

That's a good point.

Barnaby Nelson

54:20 - 55:43

I mean, so I think there's two answers to that. I think one is, do they understand and care? I don't think I mean at the end of the day an asset manager is a generalization of multiple job roles.

I think that one of the big challenges is ultimately does the person who's picking the stock to invest in understand the inherent frictions that corporate actions create? So basically is the portfolio manager penalizing the issuer for being rubbish at corporate actions? No. But can the collective unit of the asset manager afford not to care anymore? We're doing some research recently that I think the average fund manager has to rip out on a local level of each fund about $1,500,000 of their operating cost every year.

So mid tier fund manager of like $1,000,000,000 or something like that. So realistically what that means is basically is if you are no longer looking at trimming.

So a fund manager cannot afford just to be looking around and saying okay I'm going to click my brokers' comms a little bit. I'm going to be a bit better on FX.

The fund manager now because of all everything the macro around the shift to passive just the complete lack of revenue coming in and margin coming in off the active space there is no choice. The fund manager has to find transformational savings.

And where else if we're talking about $169,000,000,000 of efficiency in the market There's not many areas where you can go and trip over that kind of number.

Tim Lind

55:43 - 56:29

Yes. And that's what we're trying to do here.

How do we link these operational challenges to the bigger business model and recognizing that no matter how convicted you are as an individual firm to better operational efficiency, you're not going to achieve that outcome without a commensurate commitment by the bank that is above you and the investor or bank below you. So this is truly, Dan, you called it an ecosystem.

And maybe that's is that the best learning we'd have from your digital asset world is the spirit of collaboration and looking at how we're going to join hands and really solve this problem? Here's another factor,.

Dan Doney

56:29 - 57:49

a driving force, people, investors from retail to institutional. The drivers for investors are new and innovative financial services, a better way to use the value that they have, more convenience, easier access to 20 fourseven movement of that value.

So there are drivers that they're looking for. And for parties who are able to reform the back and middle office systems, if you can't change that, you can't provide those new financial services.

So to the extent that someone does and parties are, it creates demand. And if you can't make those changes, you're left behind.

So in many ways, that's a driver also of reform. So for example, parties, sovereign investors who have real estate funds with massive value that they can't use as collateral.

Yeah. That's collateral processes don't support alternative assets.

Why? Because the data's hard and it's alternative assets. Well, that's a big driver because that's a lot of lost value.

When someone comes with a model who can provide that, then suddenly all that value that's bottled up and inaccessible is going to go to that to that location. And that drives the kind of reform that I think, again,.

Tim Lind

57:49 - 57:49

in.

Dan Doney

57:49 - 57:55

the end, it isn't only about cost, though that's certainly a driver. It's about better services on the front end.

Tim Lind

57:55 - 59:15

That's another good point. I allocate to cash, equity, debt, maybe real estate, but can these technologies unlock innovation and ability for me to get risk and exposure in even new markets? Hard to create alpha in a passive index world.

Some would argue there's none to be had. And that only 15 stocks drive the growth of our eight of the top 10 stocks are in terms of market capital are American.

So how do we innovate and find exposure to investments that can create returns in the future outside of our traditional world. So and maybe so why are we here at the end of the day? Why are we talking about this? Are we the generation that solves this issue and fundamentally addresses it? Maybe that's the question.

My son, just graduating next week, He I have another son in the capital markets world. Is he going to be sitting on one of these panels thirty years from now, bemusing the challenges of lineage and corporate actions data? Are we going to leave this market a better place than we found it? I think that's kind of the at least what motivates me.

I don't know if you guys feel that you have a duty to solve the problems you had in your youth, before you retire from this industry. Is that important?

Dan Doney

59:15 - 01:00:17

It absolutely motivates me. And, Barney, I'm sure you're you're the same way.

We we have to do better. So look, this it's real investor value.

The friction that's in legacy financial systems has a cost that that folks don't see, but it but there's a cost that no matter how it's borne, it's ultimately borne by the investors and the returns that they get. We have a responsibility to maximize their returns as financial institutions.

That's true. But there's also access.

So even in the alternative assets case, certain investors get access to these alternative actions, alternative investment opportunities, which may produce better yield, but others do not. Whether it's accredited or not or just globally Yeah.

At parties who simply don't have access to good financial systems, I believe we have a responsibility to make the best investment opportunities available to everybody. I'm driven by that principle, and I think I'm at the place where you can actually pull that off in an enormous way.

Tim Lind

01:00:17 - 01:00:54

Very big statement right there. I mean, as we see the growth of private markets and the fragmentation, lack of standards, lack of process.

And what you said, which is really important, lack of participation. I'm not rich enough or qualified enough to participate in private markets.

And so it's denying capital that otherwise would flow to that area, but it hasn't created a level of transparency and efficiency that would extend its investment opportunities to mere mortals with less than $5,000,000 in underinvestable assets.

Dan Doney

01:00:54 - 01:01:34

And these are questions of data access. So look, in order for investments to be fair to a retail to my teenage son who happened to get involved in the Reddit case from a number of years back, the main stock piece, Proper information out to those edge investors is very important.

And so we need better delivery models, in order to make that information much more accessible. That's a key part of what we're driven to do, what these new models offer.

But along with that comes access. Along with access becomes better opportunity for parties and, it's certainly a responsibility for the region.

Tim Lind

01:01:34 - 01:01:39

And the capital will flow like water if you could create these kind of things. It's an untapped source of of capital.

Sorry about that.

Barnaby Nelson

01:01:39 - 01:03:19

No. No.

I was just thinking I don't think we have any choice anyway, to be honest. I mean, I agree that we're all coming to work wanting to do this better into and, you know, nowhere more so than in the corporate action space.

I mean, if you think corporate actions is the most passionate subject, it's like a club. Anyone anyone the minute you say that you've been tarnished by the corporate action problem, people suddenly put their arms around you and say, oh my god, need to so but I think I just I I think all of the trends that you're talking about in terms of retail participation, the shift to private assets, the shift of liquidity away from listings towards delisting activity or private loads all of it is basically it's there in the numbers.

I just don't think anyone has any choice. Every one of these pieces the money is moving.

And so the only real question is whether you follow it or whether you base the or you're too slow. But at the end of the day if you rely on basically just moving listed securities around different portfolios today with high degrees of friction you're not going to be in business in ten years.

It's the portfolio as you said it's real estate. It's private securities.

It is basically it's doing it to a high degree of efficiency for somebody who expects those private securities to move in real time with complete valuation, complete visibility around the whole thing, and they should all be financeable and mobile. You know, to describe that, it sounds to any banker like an absolute pie in the sky.

But at the end of the day that's pretty much what's happening right now. It's just that we're not joining all the dots.

But as I said if you are just basically trying to run, an S and P 500 fund of listed equities and hope that basically your margins will just carry through the next ten years, It's a flat no. It just cannot happen.

Tim Lind

01:03:19 - 01:05:31

So it's unsustainable, fundamentally unsustainable. There's a lot of unsustainable things in our world that we seem to kick the can down the road and fail to acknowledge.

And maybe that again, maybe that's why we're here to appeal not just to the the logical technical personas that we're trying to reach with podcasts like this, but perhaps the emotional. The time is now.

Leave this place a better in a better state than you found it. And maybe that's the best thing you could achieve in your career, is that your kids don't suffer the same I'm seeing a team of psychiatrists as a result of my corporate action.

I'm sure. Yeah.

So I can tell you, it's a big club. So the mental health community is well served by this domain.

But you know, that that's ultimately you know, people ask, why are you talking about this? Why did we wanna do these kind of podcasts? But this is the type of engagement. Yeah.

Now is the time to actually address it. And, fundamentally, we think reimagine is a cliche, but I do believe that this is the process.

This is the time the technology exists. The mentality, I hope, exists and the recognition that our current world is unsustainable, I think, may be the cherry on top.

Yes. Absolutely.

Do the one last question perhaps is that we do see government intervention. When markets can't find equilibrium, when negative externalities are borne by people that can't redress those externalities, when corporations pollute the environment, for example, the government is there to create equilibrium in a market that can't find its own equilibrium, so to speak.

Is this function, this process creating so much negative externalities on investors? Because all these fees are ultimately paid by us as investors, right? All this cost is ultimately borne by us. Is it so profound that the government should consider regulators should consider intervening somewhere, either to force the hand of issuers in their behavior, force the hands of intermediaries to reduce this fragmentation? Or is this something that the market is going to sort out on its own, Brian?

Barnaby Nelson

01:05:31 - 01:07:47

So I think for me, there's kind of two ways of looking at this. I think obviously, anyone watching this from a banking industry would say, oh my God, please don't say yes.

We want governments. This is not an invitation for more regulation.

But I think at the end of the day for me what's been really fascinating about the blockchain journey is the total change in the way that we interact with our regulators. That basically that if what was great about the entire kind of this entire innovation process that's been going on is that we all started at zero in terms of knowledge.

And it has been at the beginning there was this kind of like regulator to institution kind of what do you know? What do you think? And then there was an acknowledgment that nobody knows anything more than the others. So what's happening now is much more solutioning going on in the handshake between the industry and regulators to say look there's an opportunity here.

There's ways that we need to do it. We need of you regulators we need X, Y and Z.

What do you reckon? And for that interchange and so I think there is a great opportunity to continue the journey together like as a team that includes the regulator being a seat at the table. I think there are also though plenty of examples of really, really bad cases where we have asked regulators to arbiter not legislate.

And I think for me the big difference is to go to a regulator with a fuzzy idea of kind of look none of us can agree on this, but we need you to sort it out. And the regulator turns around is generally obviously not as expert in living and breathing all these things and they come up with something that is substandard, complicated and quite often actually creates more problems than it solves.

I think for me the real risk of basically inviting in bad is sorry the real risk of inviting in regulation is that we end up with bad regulation. The real opportunity in working with regulators to build a community project is that we end up having a perfect match ideally of industry objectives legislation that supports those industry objectives and something that's well crafted.

So there's definitely there's plenty of upside and there's downside to getting this wrong.

Tim Lind

01:07:47 - 01:09:07

Very well said, Bonnie. If there's a we're talking about a collaborative and trusting mentality between account owners and account servicers, would that trust then also extend to regulators? And I like the way you said it, not through legislation but arbitration and bringing the parties to the table and understanding the technicalities of the issue at hand and say, listen, we think you can sort this out.

We want you to sort this out. If you can't, I'm always there in the background and we'll consider solving the issue if you guys can't.

And with shareholder rights directives in Europe, there's certainly a theme that investors should participate actively in the governance of companies, right? There shouldn't be that kind of communication. I'm not sure it's been extended to information as it flows to investors and that they have a right to understand consistently what their rights and entitlements are.

But do you have the same kind of the subject of crypto regulation and different markets not even wanting to be left behind, we've seen kind of a change in administration in our world. Do you have the same hope that digital assets and its relevance in traditional finance with oversight of regulators, do you have hope that we're heading in the right direction with all this, Dan?

Dan Doney

01:09:07 - 01:09:33

I'm not sure that I could top Barney's spectacular answer to to this, but I'm gonna take a a crack at at least some additional Right. Right.

So let me so I I completely agree. Regulars are not good at prescribing technical solution saying for sure it it that it shall be this is picking the winner.

That's right. Because but but regulators can have a huge impact on the innovation.

Tim Lind

01:09:33 - 01:09:34

That's right.

Dan Doney

01:09:34 - 01:11:09

Mindset and how agile is the movement of the markets. This is a wicked problem though.

So many folks, especially in the blockchain world, discount the importance of investor protection. And the real responsibility of regulators that, yes, we want to allow innovation in this space, but in the end, it can't be at this expense of mom and pop.

The blockchain world, if you look at at its history, mom and pop have lost a lot of money, on scams and theft and and other things. So we have to be more responsible than that.

And I'm afraid as there's now this real move like drive to move forward, even institutionally, some folks are forgetting about those responsibilities. We must move forward in a responsible fashion and regulators have a responsibility to ensure that we do.

However, this is a matter of national security. If our markets are not more efficient and accessible than other markets, value will move elsewhere.

And so we do have to have a favorable environment. That means regulating by first principles, not that launching as a technology, it's a means.

It's not the ends in in this model. And so it's not either good or bad.

It's is it being used in such a way that allows for trust and provenance and accessibility to thrive? And if yes, then it should be encouraged to move forward. I think we're seeing a lot more signs of that responsible innovation.

And that's the right view, in my view, of a regulatory framework.

Tim Lind

01:11:09 - 01:12:06

And maybe that's your best role here, Dan, we figured today. You're the linchpin between traditional finance and digital finance in that the digital finance people have to be have to understand the issues of traditional finance and what it means to have certainty, legal certainty.

Before I contribute any of my hard earned capital, I want certainty on where that asset is and how I can find liquidity and pull it back if I need to. So the traditional world is weighs heavy on a lot of investors.

So if you can bridge the mentality of traditional finance and digital finance, convincing traditional finance of the utility of smart contracts, blockchain and how it can solve traditional finance issues and then encourage the digital finance people to understand the limitations and illegal infrastructures and certainty of the traditional finance world. Perhaps that's your biggest role in light, Dan.

Dan Doney

01:12:06 - 01:12:09

Yeah. Maybe you buy a lot of.

Tim Lind

01:12:09 - 01:12:09

We sell a lot.

Dan Doney

01:12:09 - 01:12:11

of the stuff. The.

Tim Lind

01:12:11 - 01:12:13

whole whole whole whole description.

Dan Doney

01:12:13 - 01:13:14

So the blockchain world has this mindset that that if you put your money into a bad smart contract and it gets lost, well, that's on you. That's not gonna work at market scale.

That's that's irresponsible in general. Can't expect grandma to be a smart contract auditor.

You need to have trust and accountability in this framework. It and that's established through tried and true models, associated with this such that people can trust the movement and safekeeping of their value.

The traditional world has established that in profound ways. That must be injected into this new blockchain world in important ways and regulators have an important oversight.

At the same time, we can't afford the inefficiency and mistakes and lack of information clarity in the legacy world anymore because it's holding back fair access to investment opportunity. So let's change both.

Let's come together. Let's be responsible.

Let's recognize the value of each party and actually drive to the world as it can be.

Tim Lind

01:13:14 - 01:14:01

Now Dan, you mentioned earlier T plus one and accelerated settlement. It thinks every transaction in our world, every process in our world is truncating in terms of time.

And we recognize time is literally money in our business. And corporate actions and the latency of how information is communicated from issuer onto investor and all the hands that it passes through in that process.

And God forbid there's an anomaly that was a mistake at its origin. That anomaly bounces back a million times as well.

Different time zones, etcetera, you could take days to resolve an issue. How important is time and truncating this time? How important is that in this discussion? Yes.

I mean,.

Barnaby Nelson

01:14:01 - 01:16:11

so I think if corporate actions and then other areas, I mean, the two stats that spring to mind in the corporate actions or asset servicing space is that I remember somebody saying that the average retail investor gets their dividend check about fifty two days after the initial announcement of the dividend. So fifty two days of an average earnings of about 2.

5 basis points overnight. So that's just literally, as you said, time is money.

The other way though that I think is you've got the compounding effect of absence of time on risk because in the proxy space some of the great platforms that have kind of been kind of implemented in the last few years have taken about three days out of the overall proxy journey from issuer to beneficial owner back again. So if you think what that means, it means that basically before people were having they had about four days on average.

The average portfolio manager would have four days in their day job to understand an entire AGM to basically analyze it, speak to their colleagues, speak to the issuer maybe, and then understand how they were going to elect. Four days has now become a week.

You know, in the day job, that is quite meaningful because what was happening before is that basically when you've only got four days, everyone sends it through at the eleventh hour which means that the issuer then basically gets 90% of their elections within the space of a couple of hours which creates huge operational risk. If stuff's getting lost, if stuff's incorrect you're dealing with thousands of callbacks.

And so the risk just kind of creeps up astronomically. So for me the real thing is actually is that by giving people more time, get people from four days to a week, suddenly you can actually they can get it back maybe a day before, maybe a day and a half before.

That means the issuer's life is better. That means that the overall risk of the process is better.

So better decisions, better communication, less risk, less errors. So time the financial value of time is very, very clear.

I think that the compounding effect of absence of time is also is really hard to ignore and I think that's true for all voluntary events of every description in the asset servicing space.

Tim Lind

01:16:11 - 01:16:29

And maybe the same question to you Dan. Time has seemed to be a component of the blockchain and digital assets, the instantaneous movement of value from one party to the other.

Time has seemed to be a big part of that selling point of the technology. Is that something you'd agree with as well?

Dan Doney

01:16:29 - 01:19:03

It is. It it is the the selling point.

Blockchains form consensus in a matter, depending on the blockchain, of seconds in the big scheme of things. And and so we say, as we went from t plus five to t plus three to two and to now one, folks don't realize what a big accomplishment t plus one was.

But now we look ahead and say, what about t plus zero? What stands between t plus one and t plus zero? In the end, what T plus zero means is that across all systems, all dark pools, all trading systems, all distributed ledgers, all systems everywhere, We completely understand at every instant in time the total ownership record such that if I strike a dividend at exactly this millisecond, I can say for sure all of the rightful owners. Make no mistake.

That is a massive task. It's massive.

If even and the party will say, well, Blockchain can solve that. Blockchain can solve it to, as I said, t plus five, and by five, I mean five seconds.

A blockchain network can solve that problem. But there won't be just one blockchain network.

And so now what is the time sync and what if that blockchain network is in the process of forking? There are a whole bunch of other factors that need to be accounted for as we accelerate this cycle so that we can get to record dates. And I think the best we'll probably do is t plus five seconds, in this new world.

I think that can be achieved in this framework, but it is a massive undertaking to to get there. And it's not just about one blockchain, for the for the purists who are out there who think that this is gonna be that that the existence of this or that great new network.

By the way, if there was one network on which all truth would reside, that would mean it has to handle every transaction at scale and Blockchain can't. Really, theoretically, it's impossible for it to handle every state change that could occur, in that world.

And it would also be the end of innovation because what about the next blockchain network that's capable of actually scaling out? It can't because we only have one, we can only have one, can't compete in that new model. We don't want that world.

There's always going to be this process of pulling together the information to form consensus in a way that involves blockchain technology, to be sure, but more. And some of that more is what traditional systems are designed to do.

But let's have that target. Let's get to T plus five seconds.

Tim Lind

01:19:03 - 01:19:07

You're going to have to trademark that t plus five seconds.

Barnaby Nelson

01:19:07 - 01:19:55

The thing I love, if I may, is just in the context of T1 and all the journey that we've gone on in the last few years, how many people are still running overnight batches? So I love the idea of going to some of these people and saying t plus five seconds. You know, how many people are in the collateral space depositing collateral overnight because they want to make sure it's there by 8AM in the morning.

You know, how many people are basically putting collateral up even hours ahead of time just to make sure that it gets there on time. You know, the idea of getting down to sub an hour would be would be wonderful in in an era of, you know, where we stand today.

But, you know, as you said, the destination is is there. But I think for me the the enormous ground that we can cover by moving from overnight to intraday of any description is vast.

And again.

Dan Doney

01:19:55 - 01:20:01

You've played it. You put the measures out there.

It's in the hundreds of millions of dollars, billions likely.

Barnaby Nelson

01:20:01 - 01:20:01

Absolutely. Yeah.

Dan Doney

01:20:01 - 01:20:06

And, you know, in many cases, on a daily basis, we're talking about millions and millions.

Tim Lind

01:20:06 - 01:20:06

Yeah.

Dan Doney

01:20:06 - 01:20:16

So there's the value proposition is there. Yeah.

Now it's actually getting all parties to align on the solution sets, and that's where we need work.

Tim Lind

01:20:16 - 01:21:20

Well, gentlemen, I'm afraid we're going to have to leave it there. I want to thank Barney Nelson from The Value Exchange for joining us.

I want to thank Dan Doney, Digital Dan from our digital assets business here. Again proving that traditional assets and digital assets can collaborate and get along.

Perhaps we found Digital Dan's calling as an ambassador for both sides to bridge this breakdown of communication I think that we see between these markets. But hopefully, there's a case for change.

We're appealing to your emotional and trying to leave this market in a better way than you found it. So appreciate that.

And I just want to say thank you for all those that spent your time in listening to this podcast. I hope we've connected some dots for you, hopefully motivated you to rethink the way we do things and get involved and collaborate not only with your partners and your clients, but in a greater spirit of collaboration and imagination on how we could address these issues.

Thank you very much.