Will blockchain disrupt the ETF industry with a trustless model?

With more than $5,000 billion asset under management at the first quarter on this year, the ETFs industry (tracker funds) has exploded within the past two decades. There is today even more trackers in the world than securities; “we count tens of thousands with infinite combinaisons” explains Arnaud Llinas, Head of Lyxor ETF at Lyxor Asset Management.

The asset manager’s goal is to use the data correctly. It is a crucial issue in the industry, that is emphasized by transparency requirements towards clients and regulatory authorities. Funds composition, counterparty risk, collaterals… transparency is total at the PRIIPs and MiFID II era.

At Lyxor ETF, the regulatory burden linked to data transpires in a €2.5 million budget dedicated to analysts and developers hiring, IT equipment and multiple subscriptions to data vendors (Bloomberg, Reuters, etc). Even though those companies play a major role in asset management, they rely on aging technologies (SMTP) and only 1 out of 10 clients at Lyxor ETF uses APIs (application programming interface).

How to optimize efficiency in an ultra competitive industry defined by pressure on margins, almost identical produits and a total war on prices? According to Arnaud Llinas, cost pooling (asset management, reporting) is an opportunity. Disrupt the bilateral relationship on which the data access model is based on would create a major change in terms of costs. From this idea derives the evidence of a model based on a distributed ledger technology.

The increase in volume of distributed ETFs contributes to the explosion of the demand for data and “if we do not react, our data budget will increase linearly with the amount of distributors” declares Arnaud Llinas. According to him, new participants using advanced technologies (e.g. robo advisors) are inexpensive to integrate. “The transformation of existing models is extremely expensive. There, you have a universe of development”.

Concerning transactions, blockchain could accelerate the settlement process, remaining today at D+2 for ETFs. However, the technology’s development involves potential threats for managers: “if traditional asset managers find out how to bypass the stock exchange to benefit from a direct client relationship, then the tables might turn”.

In the long run, blockchain will allow different participants to bypass third party usage whose role is today guaranteed by clearing houses and custodians. For now, it is still science fiction, reckons the Head of Lyxor ETF.

Presentation by Arnaud Llinas, Head of Lyxor ETF at Lyxor Asset Management interrogated by Paul Bureau, Head of the blockchain project AIR Fund at OneWealthPlace.