FINRA Report January 2017: Distributed Ledger Technology for the Securities Industry

Distributed Ledger Technology (DLT) has been gaining ground in the financial services sector for a few years now and as with many emerging technologies, adoption is slow for authorities such as FINRA and SEC.  

However, tying it all together between state regulations, international exchanges, clearing houses, banking systems, and more is proving to be a challenge for regulating authorities which are often tasked with providing clear and concise oversight based on existing data sets and future paradigms.

Implementing DLT for BDs and RIAs

New era Fintech developers are hoping to see flexibility and adaptability in new regulation rulings for the securities industry; where past rulings and actions would often stifle technology growth because rules had been devised based on historical recordkeeping processes; systems which are less efficient since the wakening of distributed ledgers. Broker-dealer and RIA firms that are eager to modernize and gain a competitive advantage are challenged in finding ways to apply best practice approaches for compliance with books and records rules as well as many other areas of regulatory compliance.

To advance through obstacles, consortiums and start-ups have developed sandbox environments where Fintech innovators can experiment and test ideas. In the beginning there were blockchains, however disadvantages were uncovered in the all access central ledger of “write-only-read-many” (WORM). Seeking new technology designs developers expanded on the role and purpose of ledger distribution, and added smart contracts to help round out automation. This sparked the development of distributed ledger technology which builds upon information restrictions based on a party’s relevance in the transaction.

In January 2017 FINRA released the report “Distributed Ledger Technology: Implications of Blockchain for the Securities Industry” outlining discussion about challenges facing regulated firms and regulators. The report addresses several potential risks and concerns, and poses numerous questions for feedback from the financial services industry. FINRA also discusses various methods of incorporating DLT while factoring in questions about its risk in applications. Market applications being researched for DLT include:

  • Equity market – administration purposes in tracking transfer of shares, fulfilling privacy restrictions, and developing real-time settlement recording
  • Debt market – creating faster clearing and settlement turn-around and automating bond payment and coupon redemption
  • Derivative market – simplifying complex post-trade events with automated processes and transparency
  • Industry utilities – developing a central repository of reference data for securities products, thus eliminating the need for each participant to maintain their own reference data

The FINRA report dives into concerns such as market efficiency and how real-time trade settlements could impact operations; desired level of transparency and disadvantages to non-market players; the role of intermediaries and blurring of line between execution and settlement; and operational risk from data sharing.  

In exploring opportunities and evaluating risk of DLT applications, FINRA opened a window of comment through March 2017 where industry participants and technology developers were able to provide feedback on methodology and challenges. The January 2017 report by FINRA on Distributed Ledger Technology outlines many of the challenges FINRA has identified and asks for comment regarding governance concerns, operational structure designs, and network security considerations.

Broker-dealers exploring the possibility of issuing and trading securities using automated actions, or maintaining records on a DLT network are advised to be cognizant of federal and state laws as well as regulatory guidelines from authorities such as FINRA and the SEC. RND Resources Inc is familiar with DLT approaches and provides guidance to BD’s and RIA’s pursuing a Fintech strategy. Contact us to discuss your next move.


Download a copy of the FINRA | Distributed Ledger Technology: Implications of Blockchain in the Securities Industry

(DLT) Distributed Ledger Technology improves financial industry efficiency, transparency, post-trade processing, and operational risk. RND Resources is leading the way for Broker-dealers and Registered Investment Advisors. We assist with start-up development of Fintech strategy and provide consulting services for firms seeking emerging technology solutions or development of DLT, blockchains, and smart contracts. Our expertise includes:  

DLT | Smart Contract Framework Implementation & Testing Firms we can help
Regulatory considerations Governance Broker-Dealers
Procedures – Recordkeeping Cybersecurity RIA / Investment Co
Materiality impact Supervision High Frequency Traders
Digital currencies / securities Carrying & clearing Wealth – Private funds
FINRA & SEC Registration Automating actions Robo-advisors / online services

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