Harris KhanThe BS 8453:2011 Banking, currencies & finance standard (BS BS 8453:2011) has been in force since 17 December 2011. No amendments have been made to the standard since that date.
The British Standards Institution will review the standard again in 2021. Revised standards normally take a number of years to become available. However with the increasing interest in Blockchain and distributed ledger technologies (DLT) the Banking Standards Board has announced its intention to bring BS BS 8453 up to date with the latest technology and information within a year of the time the BS BS 8453:2011 standard next falls under review.
The Banking Standards Board has also established a FinTech Forum that will provide a means for interested parties to participate in the preparation of the revised standard.
Overview
The BS 8453:2011 Banking, currencies & finance standard (BS 8453:2011) contains a series of standards to assist organizations forming a view on whether a DLT system is suitable for use in meeting the requirements of a contractual relationship.
The BS 8453:2011 Banking, currencies & finance standard (BS 8453:2011) deals with three types of transactions:
- Contractual Relationships
- DLT Systems
- Regulatory requirements
These three areas are made up of a number of requirements together with tests that an organization can apply to determine whether a DLT system would be suitable for use in meeting contractual requirements.
Contractual relationships
A contractual relationship in itself is a standard where the following requirements are met:
The contractual relationship is made up of a series of individual contractual relationships and commitments between the organization and an individual or organization.
The contractual relationship is governed by common law.
The contractual relationship may be made up of a number of different types of agreement such as a loan, a buy-back agreement or re-purchase agreement.
The contractual relationship is documented by the organization in such a way as to meet the contractual requirements of all of the individual contractual relationships and commitments.
The type of agreements that are covered by this standard include:
- Deposit agreements where a bank provides a deposit account or a safety deposit box to an individual.
- Interbank loans where two banks provide a loan to each other.
- Interbank foreign exchange transactions where banks perform the role of buying and selling a currency to and from each other on a spot, forward or options basis.
- Repurchase agreements where the agreement is a commitment by the organization to provide a security or to a transfer cash or investments to the counterparty on a specific date.
- Forward contracts where the agreement is based on a derivative where the settlement is through physical delivery. It also covers derivative transactions where cash, securities and investment performance are not settled through physical delivery between the banks concerned.
DLT systems
The BS BS 8453:2011 Banking, currencies & finance standard (BS BS 8453:2011) defines a DLT system as:
A system which maintains and manages the records of the individual contractual relationship and commitments between an organization and an individual or organization by:
(a) balancing the individual contractual relationship and commitments on a real-time, continuous basis in accordance with reconciliations on a real-time, continuous basis; and
(b) the individual contractual relationships and commitments being stored on a shared database in such a way that they are accessible to the broadest range of appropriate counter parties.
This is a very important section of the standard because it covers the actual running of the DLT system. These requirements are also designed to ensure the DLT system is suitable for the activity.
The standard requires that specific parts of the DLT system are established in a specific way so that it provides the relevant levels of assurance. These requirements include:
Each entry on the shared database must include the following information:
- (a) A unique user identifier for the individual contractual relationship or commitment.
- (b) The date of the individual contractual relationship or commitment.
- (c) The amount of the individual contractual relationship or commitment.
- (d) The type of individual contractual relationship or commitment.
The system must include specific reconciliation mechanisms and reports:
Any changes to the individual contractual relationships or commitments must be reconciled regularly in accordance with a specific schedule as defined by the organization to ensure the system remains accurate. This includes specifically the following:
- (a) The individual contractual relationship or commitment decreasing in amount.
- (b) The individual contractual relationship or commitment increasing in amount.
- (c) The individual contractual relationship or commitment no longer existing.
- (d) The organization no longer being the counterparty to the individual contractual relationship or commitment.
- (e) The organization no longer using a specific product.
- (f) An organization changing its name.
The system must provide an audit trail to allow the organization to provide specific reports:
The reports must include the following:
- (a) All transactions taking place within the system.
- (b) Who authorised the transaction taking place.
- (c) Who made the transaction taking place.
- (d) When the transaction occurred.
- (e) The actual transaction taking place.
- (f) Details of the entries to the shared database.
- (g) Details of the reconciliation mechanisms.
The system must be able to provide the reports so that they can be reconciled in accordance with the reconciliation report formats as laid down by the organization.
Regulatory requirements
Any bank or financial institution must have a series of systems and procedures to meet regulation requirements. The BS BS 8453:2011 Banking, currencies & finance standard (BS BS 8453:2011) defines a DLT system as providing the level of certainty required by most regulatory requirements. These requirements include:
The requirement placed on each counterparty to make a full disclosure to each other counterparty of all information which has an impact on the individual contractual relationship or commitment.
