Blockchain comes to bond market as Lombard Odier backs $15m deal
Lombard Odier Investment Managers (LOIM) has completed a bond deal using blockchain technology, in a transaction it claims is among the first of its kind.
The manager participated in a $15m (€12.6m) issue of catastrophe bonds by a Guernsey-based subsidiary of insurance specialist Solidum Partners in August.
Details of the transaction were recorded and communicated to deal participants via blockchain, a digital ledger technology that has risen to prominence in finance as the backbone of Bitcoin. The system allows participants near-instant access to secure, encrypted records of transactions that would otherwise be handled manually and take several days to complete. These records can be shared with regulators if needed.
Simon Vuille, a portfolio manager in LOIM’s insurance-linked strategies team, said the technology had “markedly lowered the transaction costs relative to other settlement methods where costs are prohibitive for transactions of this size”.
Blockchain also “mitigated counterparty risk” in the transaction and sped up the completion of the deal, Vuille added, “reducing what normally takes a few days to a matter of seconds”.
Stéphane Rey, chief technology officer at LOIM, said: “Through this blockchain transaction, we have learned more about using the technology and the more practical aspects that needed to be handled, not least legal and compliance to name a few.”
Solidum developed its own blockchain-based system, dubbed ILSBlockchain, to support its transactions in insurance-linked securities.
Cedric Edmonds, director of Solidum Re, said the project was in part a reaction to difficulties raising small amounts of capital efficiently through traditional platforms such as Euroclear.
The transaction is the latest example of asset managers and other financial services providers exploring the uses of blockchain.
Last year, Northern Trust teamed up with IBM to provide a blockchain administration system for a private equity fund run by Unigestion.
At the time, Northern Trust’s president of corporate and institutional services Peter Cherecwich said the system was “designed to deliver a significantly enhanced and efficient approach to private equity administration”.
Vanguard is currently exploring the use of blockchain in the construction of its index-tracking products, while Dutch pension managers APG and PGGM are jointly working on a blockchain-based administration service.