ZURICH/NEW YORK (Reuters) - Financial companies led by Swiss bank UBS UBSG.S are testing a blockchain platform to help them comply with new European Union trade data standards due to come into force next year.

FILE PHOTO: Christmas decorations are seen at the building of Swiss bank UBS at the Paradeplatz square in Zurich, Switzerland, November 27, 2017. REUTERS/Arnd Wiegmann

Blockchain, the technology underpinning cryptocurrencies such as bitcoin, is a shared and immutable database maintained by a network of computers on the internet.

The more stringent requirements are part of the Markets in Financial Instruments Directive II, an overhaul of EU rules aimed at improving financial market transparency..

“The project is getting market participants to collaborate using blockchain to improve regulatory reporting,” Peter Stephens, head of blockchain at UBS, told Reuters.

The group, which includes Barclays BARC.N, Credit Suisse CSGN.S, KBC KBC.BR, Swiss stock exchange SIX and Reuters parent Thomson Reuters TRI.TO, is testing an Ethereum blockchain to help ensure data accuracy and consensus.

Ethereum, a type of blockchain that can be used to develop decentralized applications, was invented by 23-year-old programer Vitalik Buterin. Many large companies and industry consortia have teamed up to develop standards and technology to make it easier for enterprises to use the Ethereum code, hoping it can help them streamline some of their processes.

“The point is to allow us to come to a consensus for this noncompetitive reference data which is essential for trade reporting purposes,” Stephens said.

Rather than replacing existing processes the blockchain, which runs on the Microsoft MSFT.O Azure cloud, will let financial firms perform a "quality check" of their own data against that of others, Stephens said. UBS Head of Data Christophe Tummers added that the pilot may be expanded to not only detect anomalies but resolve them too.

The new EU rules, which are due to take effect on Jan. 3, 2018, require banks to report more data to regulators and will also oblige banks and financial firms to obtain information identifying clients, issuers and counterparties of trades.

One element in this is a Legal Entity Identifier (LEI), a unique 20-digit code that connects key information about a company or legal entity such as its name, location, industry and regulatory data, which financial groups must obtain from clients before making any transactions that require reporting.

Firms can anonymously submit data onto the private blockchain, which will then check for any anomalies against other submissions under the same LEI, allowing the firm to update or standardise its own submissions.

Financial institutions have been investing in blockchain with the aim of developing software that can help them better manage some data-heavy processes. Proponents say it is well suited for when many parties need access to the same data.

“This use of blockchain to solve real-world regulatory requirements in a cost effective way is very appealing,” Credit Suisse’s head of blockchain strategy, Emmanuel Aidoo, said.

The pilot phase, which uses real LEI data, is set to conclude at the end of January.