As I wrote about in my first Celent blog, the capital markets post-trade industry is transforming, and none too soon.In that vein, The Depository Trust and Clearing Corporation’s (DTCC) recent announcement that their Project Ion alternative settlement platform has gone live in a parallel production environment is an example of an exciting innovation in the post-trade space that has been long overdue.The platform, built on a private, permissioned blockchain in collaboration with select clients and in partnership with R3, is settling a small piece of the U.S. equities daily volume but has the potential to transform the clearing and settlement process.The technology sets the stage for anticipated shortened settlement cycles that will reduce market risk, enhance resilience, and reduce margin requirements for industry participants.The reduction of the settlement of U.S. equities from two days after trade date to one day (T+1) has been endorsed by the Securities and Exchange Commission (SEC) who earlier this year voted in favor of the move, which is now targeted for March 2024.
However, moving trade settlement and clearing on distributed ledger technology holds enormous promise for other post-trade processes that currently plague the industry’s back- and middle-office operations departments.The efficiencies that can be achieved, predicated on widespread adoption, are extremely exciting to this post-trade nerd.DLT presents opportunities to rewire the existing settlement structure where there are likely several versions of a single trade, resulting in the requirement to not only synchronize multiple databases but to quickly identify and resolve any resulting differences – a time consuming task that exposes firms to financial and operations risks.By removing many if not all of the intermediaries involved in a trade, and having a single version of a trade, reduces the need for this reconciliation of multiple systems.Inefficiencies arising from the many manual processes used today in the post-trade environment could conceivably go away.Costs arising from margin obligations and required collateral in the legacy world be reduced through DLT and smart contracts that may optimize the calculation and posting of margin more efficiently.
To temper my optimism, there are challenges to converting post-trade processes to DLT.One need not look further than the Australian Stock Exchange’s initiative to migrate their CHESS core trading systems to the technology.Begun in 2017, the project has encountered numerous delays, and ASX recently announced that the go-live date will be further delayed after identifying that more work needs to be done around resiliency and scalability.
However, there are many more examples of real-world DLT use cases.Switzerland’s SIX Digital Exchange (SDX) was launched late last year with the first digital bond issuance in a fully regulated environment.In July, BNY Mellon and Goldman Sachs settled the first agency securities lending transactions on HQLAx, a distributed ledger technology platform.And in the area of repos, there are live blockchain-based offerings.Broadridge’s Distributed Ledger Repo (DLR) technology is digitizing the repo workflow to enable instant settlement using smart contracts went live last year. Meanwhile, JPMorgan’s digital asset unit, Onyx launched a blockchain-based intra-day repo platform in 2020 for U.S. Treasuries (with plans to expand to other assets).
I may be overly optimistic, but I am truly excited about the potential for DLT to revolutionize post-trade processing, and it begins with settlement and clearing.It’s going to be fun ride!