Blockchain is the financial future

 Firstly, the recent tax change in Luxembourg indicates Luxembourg is serious about taking action to boost the Luxembourg securitisation structured products industry.

The principal challenge now is to reduce Securisation costs even further to make Securitisation cost-effective for ever smaller financial products – thus widening their access and uptake.

Today, there are two main ways for investors to invest in a Securitisation, and each has its different costs:

1.      one way is for the investor to complete a subscription agreement and invest directly in the Securitisation by making a bank transfer.

a.      This requires the Securitisation to do anti-money laundering checks (KYC/AML) on the investor (which costs time and money) and

b.      it also requires the Securitisation to have a bank account. Bank accounts for investment vehicles generally cost around EUR 3000 per year because of the extra tax reporting (CRS for Europe, FATCA for the US) which the bank has to do due to the entity being classified as a Passive NFE/NFFE. Securitisations (unlike Alternative Investment Funds) might (to be confirmed) be permitted to have accounts with non-bank providers (e.g. EMIs (electronic money institutions)) – but (to be confirmed) EMIs do not yet provide cheap prices either.

There is a lot of innovation happening both in KYC/AML processing and in payments (presumably including tax reporting), so hopefully these costs will decrease.

2.      The other way is for the investor to instruct their bank to invest via ISIN from the investor's securities account. Here costs arise due to the manual elements in the international clearing systems. Bank are investing large amounts into blockchain-related solutions to reduce these elements, but the cost of investing via ISIN remains significant, especially for smaller-scale Securitisations. The steps involved in investing via ISIN include:

a.      Part of the Securitisation setup involves preparing the Securitisation termsheet (i.e. the terms (i.e. contract) under which the investor invests) and having it manually approved by a clearing agency (this could be SIX Telekurs or UBS) which then issues an ISIN for it.

b.      Once there is an ISIN, the investor calls or messages their banker and instructs them to invest in the specific ISIN

c.      The banker then messages the paying agent (often only after the bank has collected several orders and the product launch date is approaching) to place the orders

d.      The paying agent checks the orders, and shares order information with the Securitisation manager (and action can be taken if needed (e.g. delay launch date)) then authorizes launch (where the money transfers to the paying agent and simultaneously the securities are issued, in DVP (delivery versus payment)).

e.      Another part of the Securitisation setup involves obtaining paying agent approval to invest into the underlying assets. This involves a manual check of legal due diligence information, which may include incorporation documents, the investment terms (e.g. offering memorandum) and forms (e.g. subscription form). If the Securitisation invests directly into the underlying asset then a manual bank transfer is made to the underlying asset. If the Securisation will invest into the underlying asset also via ISIN then the paying agent may place the order with Clearstream (and Clearstream will be the nominee investor).

f.       Performance updates sent by the underlying assets through the clearing system (for when investment was via ISIN) are subject to a manual check (and can be delayed, so Securitisation managers may also pass these updates manually to the paying agent).

Blockchain-related solutions involves smart contracts and end-to-end processing without manual intervention. Hamilton works with smart contracts in the sense of developing and maintaining agreed legal documents which all the parties are familiar with and contain only specific fields which are adjusted per transaction. In true smart contracts, once the parties have agreed the terms and signed, the execution proceeds automatically.

Here is a diagram of the first blockchain settlement for a Securitisation-type product, which was done in 2018. In 2024 Greece issued a tokenized corporate bond. In the future such methods may become widely used and significantly reduce costs.