Blockchain Series: How would a Secondary Market Asset System Work in Practice?

 

In the last post “How to  overcome these challenges to implement a Blockchain solution for Secondary Market Assets?”, we discussed the concept of a Secondary Market Asset System. This post discusses how to implement such as a “SMA System”.

Here are the key steps in the process:

  • Create the Smart Contract the legal documents would be deconstructed as follows:
    • Legal Deal Documents drafted by counsel and uploaded to SMA System
    • Consultants identify operative Legal Requirements
    • Consultants write Business Rules based on Legal Requirements
    • Programmers develop Software Code to implement Business Rules
    • Legal Deal Document, Legal Requirement, Business Rule and Software Code are “linked” to enable drill down for audit and compliance
    • External data feeds integrated to the SMA System
    • Programmers test and release the SMA System
    • Audit reports generated validating that Legal Requirements and Business Rules are being correctly applied by the SMA System

 

  • Create Compliance Certificateswhile the SMA System would perform the functions in the Smart Contract, there is also the need for a “paper trail” of certificates and instructions being issued to and executed by the Trustee or other Agents performing services to support the SMA System in which the pool of Secondary Market Assets have been deposited. That process would consist of the following:
    • Attorneys draft forms of certificates and instructions to correspond to the requirements of the Legal Deal Documents (“Approved Certificates”)
    • Approved Certificates are uploaded into Report Writer module in SMA System
    • Data generated by operation of SMA System is captured in schedules attached to the Certificates.

 

  • Validate Assets to make “Immutable Records”the loan files and loan data elements would be systematically validated as follows:
    • Automated classification function would validate that each required document was in the loan file;
    • Automated data extraction function would reverse engineer the loan tape data from the loan document and then compare it to the data in the loan tape;
    • Auto link would keep extracted data linked to the exact spot in the loan document (i.e. interest rate on page 1 of the note);
    • Exception reporting of any deficiency discovered in the process;
    • Remediation of any deficiencies tracked and corrected;
    • Publish Verified Assets to the SMA System using customer’s Blockchain of choice.

 

  • Publish to Distributed Ledger – The immutable records created in the processes described above would be published to the Blockchain from the SMA System.
    • The data and underlying asset document links will be published to the Blockchain, with a complete audit trail.
    • The publishing process will create an audit trail entry within the SMA System with the Blockchain name (and other identifying information).
    • The document links will be securely bound to the underlying repository to ensure the exact version is referenced, to be view-able for diligence, audit or compliance purposes.
    • The data in the Blockchain will contain links to the exact location of source of the data in the SMA System.

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