The excitement surrounding blockchain and distributed ledgers is unparalleled. Is it a revolutionary force poised to supplant existing legacy infrastructures, or will its impact be relatively modest in the short run?
A DTCC’s white paper on Guiding principles for the post-trade processing of tokenized securities discussed how blockchain has the potential to drive digitization at scale. It proves to deliver new benefits across the securities lifecycle from issuance through settlement across asset classes.
However, unlocking its full potential hinges on fostering broad industry collaboration and aligning the technology with the fundamental benefits of reducing risk, increasing efficiency, and lowering operational costs.
Key Use Cases of Blockchain for Post-trade Processing and Settlement
Trading is a fundamental function within post-trade processing, involving the buying and selling of various financial instruments and securities. Blockchain technology plays a pivotal role in enabling the efficient market entry of digital securities through diverse mechanisms like bilateral negotiations, centralized exchanges, decentralized exchanges, matching algorithms, and auctions.
Blockchain opens up new possibilities, including tailor-made digital instruments that cater to investor preferences. These innovative assets are made feasible by the instantaneous and customizable nature of digital security issuance, allowing them to seamlessly fulfill various business functions.
For instance, blockchain networks and digital tokens or assets can facilitate the creation of digital and automated invoices or other short-term obligations.
Current collateral management functions within post-trade processing systems are sluggish and inefficient. This is in part due to manual reconciliations and the physical delivery of securities, thus limiting the ability to respond promptly to market dynamics. To add to this, data is siloed, creating challenges in obtaining a cohesive view of collateral holdings across different depots and entities.
This fragmented structure hampers optimization across collateral deposits and the aggregation of balances across various entities and geographic locations.
Blockchain technology introduces a more streamlined collateral management approach by digitizing collateral holdings into a unified and optimized registry. Additionally, smart contracts enhance the precision of collateral management by automating margin calls and executing predetermined rules for each bilateral or intermediary relationship. The creation and digitization of collateral tokens or assets open up new markets and opportunities.
Clearing and Settlement
Clearing in post-trade processing involves the crucial task of updating accounts and coordinating the movement of funds and securities, while settlement represents the tangible exchange of assets and financial instruments.
Smart contracts can be programmed to align payments with transfers, utilizing off-chain cash payments, cryptocurrencies, or stablecoins.
When it comes to settlement, these smart contracts can accommodate various models that consider market risk tolerance and liquidity requirements, encompassing atomic settlement, deferred settlement, and deferred net settlement.
Asset management encompasses the oversight of funds and securities undertaken by investment banks and other financial institutions. Blockchain technology facilitates the automation of digital security lifecycle events such as coupons, dividends, rights exercise, maturity, and pricing. This automation streamlines service and management procedures, optimizing post-trade processing across all functions.
Regulatory Reporting and Compliance
Blockchain integration in post-trade processing provides real-time, immutable records of all transactions, making it an invaluable tool for regulatory reporting and compliance.
Regulators can access the distributed ledger to monitor market activity, detect market abuse, and ensure compliance with trading rules and regulations. This enhances transparency and simplifies regulatory oversight. However, DLT comes with its set of challenges, and we have explored that in detail in our previous blog.
Embracing blockchain is ushering in a new era for post-trade processing. The transition from disjointed workflows and outdated systems to seamlessly connected, adaptable, and transparent processes is a game-changer for the financial industry.
The integration of blockchain into the digital brokerage industry presents both promises and challenges. While blockchain systems offer opportunities for improved transparency, reduced counterparty risk, and streamlined processes, they also come with regulatory and legal obstacles that need to be addressed. Despite the complexities involved, the potential benefits of Blockchain in transforming trading, clearing, and settlement processes highlight the evolving landscape of the industry. Ongoing efforts are essential to navigate regulatory frameworks and ensure secure, efficient, and compliant digital brokerage practices.
The trading sector can leverage blockchain, which will drastically lower risks, reduce fraud, and eliminate errors. We aim to transform trade automation in a number of asset classes, such as stocks, options, fixed income, mutual funds, and digital/crypto assets, with our state-of-the-art, completely automated post-trade solution. Reach out to us right now.