- Transforming data collection from the UK financial sector
This is ACTUS’ reply on the discussion paper published by the Bank of England early 2020 „Transforming data collection from the UK financial sector“. As a general matter, we support in this reply a data standard for financial contracts/instruments based on granular transaction and position data that enables current and forward-looking analysis and that is updated regularly. With such a standard, a regulator would no longer have to rely on static snapshots of backward looking (accounting) data prepared at a moment in time. In contrast, the regulator will be able to follow the dynamics of evolving firms’ conditions in near time, as well as the implications for the financial system. These capabilities create an entirely new infrastructural layer that transforms regulatory understanding of the financial system and makes regulatory oversight highly adaptable to current and evolving needs.
- Smart Contracts, Distributed Ledgers, and the Need for an Algorithmic Financial Contract Standard
This article, written with Allan Mendelowitz, was presented at the IOHK/Cardano Summit in Miami April 2019.
Nick Szabo defined smart contracts as, “….a set of promises, specified in digital form, including protocols within which the parties perform on the other promises.” The essence of a smart contract is that it is self-executing and has a protocol to effect this, i.e. the mechanism for communicating with the smart contract. In addition, Szabo distilled four basic objectives of any contract that should be fulfilled by smart contracts. Two of these, verifiability and enforceability, are given more attention in this paper. Szabo, however, did not address what types of contracts would be most suited to be executed as smart contracts.This paper describes first the unique aspects of financial contracts that make them the most promising candidates for implementation as smart contracts. Secondly, we analyze the conditions under which the use of distributed ledgers and smart financial contracts are most likely to prove successful. This analysis concludes that unless a distributed ledger is combined with an algorithmic financial contract standard and a standard protocol, the potential benefits of smart contracts will not be realized. The corollary to this conclusion is that it is essential for FinTech to adopt such a standard in order to be able to realize its promise of a paradigm shift in finance. The combination of distributed ledger technology and an open, well documented and well tested algorithmic financial contract standard is the next logical step in the development of FinTech.
- Bank of the Future: This article written with Allan Mendelowitz and Luka Müller was presented at the “2018 Cambridge Conference on Business & Economics “ at the Murray Edwards College, Cambridge University in Cambridge UK on July 3, 2018. It discusses the core element of the bank of the future which is a standard supporting the entire life cycle of financial contracts. Such a standard must encompass the standardization of the terms plus the standardization of the algorithms that generate the state contingent future cash-flows. Since any analysis depends on these cash-flows, it is possible to ask such a contract at any time any financial relevant question regarding its value, cash-flows, risk etc. As it is still in discussion, the article is watermarked as DRAFT.
- «From digital currency to digital finance: The case for a smart financial contract standard». This peer reviewed article was written by Allan Mendelowitz and me and published in “The Journal of Risk Finance” volume 19, issue 1. It follows the same line of argument as in “Smart Contracts” published in the American Banker (see below).
We demonstrate the unique position of the financial contract within the world of contracts due to its inherently logical/mathematical nature. We show that this nature has neither been recognized nor capitalized upon even by block-chains and distributed ledgers. We also show how the world of finance will change, once a future architecture of finance orbits around the set of standardized contracts in its center.
- Smart Contracts This article was written by Allan Mendelowitz and me and published in the American Banker on November 17, 2016: Here we argue that on the Transaction Processing Level the concept of “Smart Contracts” has existed for thirty years, however in a very imperfect way. This imperfection causes multitudes of problems on the Analytic level. The current solution to this problem are intermediary data pool such as Data Warehouses. We show that this aggravates the problem. We also argue, that the concept of Smart Contracts should not be linked to the idea of distributed ledgers such as Block-Chain. What is needed is a standard for financial contracts that standardizes beside data also the cash-flow generation throughout the process. Such a smart contract will overcome the current dichotomy between the Transaction Processing and the Analytic level. Needless to say, that ACTUS represents this standard.
- ACTUS Standardized Contracts This article was written by several members of the ACTUS team for an internal publication of the Swiss Cantonal Banks. It explains the ACTUS initiative and the benefits for the banks and the financial industry as a whole.
- Limits and Opportunities of Big Data for Macro-Prudential Modeling of Financial Systemic Risk In this article written with Allan Mendelowitz we explore the use of “big data”, i.e. large unstructured data sets, within financial risk analysis. We conclude it has value, but structured data remain critical. We show that forward-looking financial analysis on the systemic level needs a data structure that represents financial contracts as algorithms that produce state contingent cash flows. Currently the industry lacks such a standard, which precludes meaningful systemic forward-looking analysis. We introduce ACTUS as an emerging standard that will enable consistent analysis on all levels. This standard will also create an infrastructure for macro financial analysis.
- Improving Systemic Risk Monitoring and Financial Market Transparency- Standardizing the Representation of Financial Instrument The task of the OFR is to define two Standards: One for the counter-parties and one for financial instruments. The definition of the Legal Entity Identifier (LEI) which is a unique counter-party ID is well underway. Parallel to this ACTUS has started it’s work. The target of ACTUS is to set the standard for financial instruments for the analytic use case. This is a world standard unifying financial analysis on the basis of “Unified Financial Analysis”. This internal paper was delivered at the OFR/FED (Federal Reserve Board Cleveland) conference in Washington on May 30, 2013 “Financial Stability Analysis: Using the Tools, Finding the Data”. It describes the state of ACTUS. At the same conference, the ACTUS website was demonstrated for the first time where contract data got entered and results were presented both graphical and numerical.
- The Operational Risk of the Office of Financial Research (OFR) “To be inundated in a mass of undecipherable data” is considered the prime operational risk of the OFR. The taks of the OFR, from a conceptual standpoint, were described in “The Regulatory Revolution”, which is the starting point of this article. From this the data need is derived. A main finding is the fact, that semantics on the data level alone – however clear and brilliant – is not sufficient. What is needed is a semantic, which can express – with computer code – the nature of a financial contract unambiguously. The notion of contract types fulfills this need. A study in order to prove the concept is proposed.
This article has about 10’000 words. It is published under: Lemieux, Victoria L, Ed. “Financial Analysis and Risk Management” Frankfurt: Springer 2013, Chapter 3.
- Regulatory Revolution: This article is written with Allan Mendelowitz and published in the August issue of GARP’s Risk Professional. Allan is one of the prime movers behind the Office of Financial Research (OFR) which is part of the sweeping Dodd/Frank Act signed in July 2010. Although considered by insiders as the section with the highest potential to change the financial market, it is not recognized yet as such by mainstream. The article argues that the OFR to become effective as hoped by the lawmakers, it has to implement structures as laid down by “Unified Financial Analysis”. The background of the OFR and the necessary structures are described in a 3000 words article.
- Standardization of Financial Contracts: Financial contracts constitute the pivotal center of finance and must therefore be the pivotal center of any financial analysis. This is however not the case and the reason for the analytical chaos (silo structures) found in banks and the industry as a whole. Sensible regulation is not possible without this standardization. This short 700 word articles discusses the main arguments.
- Risk and Regulation: This article was published in Vol. 18, No 1, 2010 of “The Journal of Financial Regulation and Compliance”. It discusses the relationship between modern financial analysis and regulation.
- Risk Taxonomy: This article I wrote with Rami Entin and it was published in GARP’s Risk Professional, December 2009. It shows the difference between the main risk classes, that they are more different than commonly assumed and what it takes, to aggregate them.
- Tear Down those Silos: The infamous silo architectures found in today’s banks have helped blurring the picture and aggravated the financial crisis. As an example: Big famous banks took up to six month to figure out their CDO positions. This article was published in Waters, July 2009 issue.
Transforming data collection from the UK financial sector“