Blockchain May Fuel Ibor’s Second Wave

The Investment Book of Record (Ibor) as a concept had the buy-side energized, and a respected industry working group even produced a prototype for a system that could allow for a single source of truth regarding investment data, but the ideas may have been ahead of their time. Now, experts say, emerging technologies such as distributed ledger may hold the key to solving the Ibor puzzle.

“In many ways, the core needs of what you want for an Ibor—bringing together different people across an organization, to support different processes, on different databases or ledgers—is very well fit for what distributed ledger is meant to do,” says Joshua Satten, director of the fintech practice at consultancy Sapient.

While the concept of Ibor as a centralized system was the target when discussions around the technology took hold around 2013 and 2014, at many firms, projects ended up fragmenting into disparate books of record, such as accounting, trading, custody and other areas.

The Ibor Standards Working Group, operating under the auspices of the Investment Management Association, produced designs for a prototype Ibor in 2014 that would allow for live-extract functionality, with an append-only record of complete transactions, but the system itself wasn’t put into widespread production. Some believe that the emergence of distributed ledger provides the key technology aspect that was lacking at the time.

“I think the designs that were constructed three years ago by the Ibor standards group around an append-only structure for transactions, and a live-extract methodology that was provably workable, is a very powerful idea that people are now starting to come around to,” says Ian Hunt, a consultant who was part of the original Ibor working group, and who has advised asset managers such as M&G on Ibor construction. “The intersection of interest between the distributed-ledger community, and asset managers who are persistently concerned with position management and Ibor, is where we’re starting to see some real solutions emerging.”

Distributed ledger, referred to as blockchain in shorthand by the industry, has seen enormous interest from financial services firms, but this has largely been confined to areas including know-your-customer compliance and certain post-trade processes such as settlement.

“There is a huge unspoken value within distributed ledger that has been centered on enterprise architecture, and the potential for a real Ibor,” says Satten. “We really think that this is the aspect in financial services that has been largely ignored, and what we’ve seen is people have focused more on the creation of peer-to-peer networks, displacing intermediaries and whatnot.”

While the functionality of distributed-ledger technology can be applied to Ibor, however, it will not be a case of simply putting in place Hyperledger or a similar blockchain system, with Ibor analytics on top. Rather, elements of distributed ledger are suited to Ibor while others are not. This results in what Hunt refers to as “blockchain-like, rather than blockchain” functionality.

“The transaction structure is mostly parallel chains working on an append-only basis, with a highly denormalized set of data structures that are optimized for extraction,” he explains. “It’s a radically different view—it’s not a classic blockchain view because it’s not a single chain with multiple transactions per block, and not strictly immutable, because those are not things that are mandated in an Ibor context within an asset manager. The notion of append-only approaches, where you’re appending complete records of transactions as they transition through their lifecycle states, is a very powerful idea.”

Where distributed ledger technology really comes into play, however, is managing an Ibor across a geographically disparate enterprise, or across multiple organizations that feed data into the book, which needs to be accurate.

“The distributed-ledger aspect is interesting, I think, because although the data structures we need for Ibor are not strictly blockchain, we could deliver an Ibor in that form—or a live-extract Ibor service within the walls of an asset manager, without needing any distributed-ledger technology. But as soon as there are multiple sites, or as soon as we’re trying to go outside of the organization and create a register that covers multiple asset owners, multiple asset managers, or conceivably covers custodian views, registrar views, and depository views as well, then the distributed ledger piece becomes invaluable,” says Hunt.

Indeed, while blockchain and distributed ledger certainly have applications in the Ibor space, they aren’t a silver bullet for a fully functional Ibor system. However, the applicability of the technology to Ibor is being actively explored, particularly among a new working group that is seeking to guide the next phase of Ibor’s development.

“I think there are two levels here—there’s a level of blockchain-like technology that is suited to the delivery of a next-generation, live-extract Ibor, and then there is how you make that accessible, usable, and manageable across multiple organizations, and that is what the distributed-ledger piece is critical for,” Hunt adds.