Exploring Ways to Enhance Performance of Processing Structured Product in Wealth Management

This was one of the post-ICO blockchain experiments that looked into whether there was any material difference between using a conventional centralized database to store data and processes, versus tokenizing a financial asset on a decentralized database. As I look back on this using my current linguistic preferences, I can almost hear the whispers of the conscious decisions that were made to set aside cognitive dissonance in order to write a coherent narrative. Well, that was the job, I suppose. FinTech is still around and has pivoted to more fashionable sub-stories of the FinTech wave. This study seeks to investigate whether the current complicated operational process for managing a wealth management structured product throughout its lifespan can be enhanced in terms of efficiency by tokenizing the structured product onto a permissioned blockchain. A structured product is a type of financial asset that allows a purchaser to obtain a tailored exposure to certain real or financial assets that cannot be found in conventional financial assets like stocks, debt and funds. An Accumulator is a widely-used structured product in which the buyer agrees to purchase a specific equity at a fixed cost over 2–3 years, no matter the actual worth of the equity at that point in time. This type of structured product is especially attractive in periods of economic growth, when the prices of financial assets are typically seen to only increase. This provides the investor with the assurance that they are essentially making a secure investment that is likely to lead to a large return. The basis of an accumulation is essentially the sale of put options by the buyer to the wealth manager, which necessitates that the buyer buy the stocks from the wealth manager in regular increments. Enthusiasm and elation bolstered the popularity of a structured product for a while, until a sharp market decline brought collective memory back to more pragmatic circumstances. Nonetheless, most wealth managers maintain a structured product desk to serve their affluent and well-informed clients. Structured products are often highly customised which necessitates a complex operational procedure throughout its lifecycle, from requesting a quote to valuating, servicing assets, ongoing risk surveillance, periodic and final settlement. This intricate process involves various departments, such as the relationship manager, structured product desk, risk managers and operations, and also requires specialised integration between the information systems that these departments use. The complexity brought difficulties, a breakdown in communication, and a hazy atmosphere which kept the wealth manager from getting a precise and recent overview of the portfolio of structured merchandise. The blockchain also holds the promise of providing a holistic view of the financial asset status which can be a game changer. The FinTech believes that "tokenization" can help overcome the issues of friction, gaps, and fog. Through it, a financial asset can be represented on a permissioned blockchain. The use of blockchain technology offers a friction-free operational process along with visibility of how each token is performing, which can bridge any communication gaps. Furthermore, the blockchain holds the potential to provide a comprehensive view of a financial asset's status, and could be revolutionary. The FinTech is joining forces with a FI to investigate the possibility of tokenizing a structured product called a FX Accumulator. This can be helpful for clients who need to increase their position in a specific currency for future usage, but want to avoid the risk of market volatility by having all the necessary increments ready on the day of use. To still meet the requirement, they can enter into an arrangement with a wealth manager, where it can be established ahead of time what rate of exchange will be applied for each small accumulation during the designated period of time. This approach effectively minimizes the risk of volatility, since the accumulation is distributed over a period. FX Accumulator was chosen for tokenization due to its simple structure, ease of servicing throughout its lifecycle, as well as not needing the use of other intermediaries like brokers or custodians. If the experiment is successful, it can illustrate the power of tokenization in enhancing the efficiency of current processes. Simultaneously, the tokenization of a financial asset could give rise to the likelihood of the token being exchanged beyond the primary parties involved. In turn, this could expand financial inclusion, making it possible for those interested in doing so to buy tokenized FX Accumulators for their own use, rather than having it confined to elite wealth management customers.

Source: https://medium.com/@notherArmchairEconomist/experiment-to-improve-the-efficiency-of-processing-wealth-management-structured-product-by-0eeacec400ad?source=rss------fintech-5