Sunday, 01 August 2021

Credit Suisse and Nomura make same-day equity trade settlement on Paxos DLT platform

By Alexander Rad

There has been a number of proof-of-concepts and tests of blockchain or distributed ledger technology in financial markets to improve efficiency, accuracy and speed of securities clearing and settlement processes and transactions. The latest involving Credit Suisse, Nomura's Instinet and Paxos brings the industry closer to scaling up instant settlement.

  • Paxos blockchain platform successfully realised same-day settlement for Credit Suisse and Instinet
  • Distributed ledger technology can shorten post-trade cycles
  • Stock exchanges are testing DLT for settlement of trades in traditional and digital assets

Credit Suisse and Instinet, a Nomura company, recently conducted a test on Paxos, a regulated blockchain platform, to show that distributed ledger technology (DLT) can shorten the time frame for settlements. The proof-of-concept (PoC) was designed around a bilateral equity trade in the US and transactions executed at 11:00 AM and 3:00 PM were settled on the same day, at 4:30 PM. Charles Cascarilla, CEO at Paxos, noted, “The use of DLT can imply 70% cost-cutting for banks”.

DLT can shorten post-trade cycles

The US market operates on the T+2 standard, meaning trade date plus two days. The Depository Trust & Clearing Corporation (DTCC) that provides the current infrastructure for clearing and settlement has recently introduced the possibilities of end-of-day settlement. However, this service is limited to a few financial institutions and it requires that the trade must be executed before 11:30 AM. Michele Hillery, general manager of equity clearing and settlement service, said that the company has re-engineered its night cycle processing to enable it.

Obviously lengthy settlement time frames may cause major problems. The noteworthy examples are the volatile trading in the Lehman Brothers stocks in the run up to the global financial crisis and when Robinhood had to stop the shares trading in GameStop. “On the contrary, a shorter settlement time frame can benefit investors and market participants by reducing credit, market and liquidity risks and promoting financial stability,” stated Kenneth E. Bentsen, Jr., president at the Securities Industry and Financial Markets Association (SIFMA).

Michael C. Bodson, president and CEO at DTCC, said, “Volumes and volatility demonstrate that the time to move to a shorter settlement cycle is now”. Recently DTCC reported that it settled 561 million transactions in 2020 and estimate that the value of the equity transactions processed by its subsidiaries reached $2.33 quadrillion in 2020.

Stock exchanges test DLT for settlement

The Hong Kong Exchange (HKEX) has been using DLT to enhance the capacity of the current infrastructure for post-trade processes and cross-border trade via Project Synapse. The Singapore Exchange (SGX) has approached the use of blockchain via Project Ubin that has completed phase 5. The project has focused on settlements of tokenised assets and targeted capital-raising objectives of firms.

New market places have emerged in Europe alongside the traditional exchanges. Oren-Olivier Puder, chairman of the board and co-founder of the Swiss-based Taurus, said, “The launch of Taurus Digital Exchange (TDX) meets the increasing demand from banks to step into a regulated, open and independent marketplace for digital assets”. This development happened against the background of new regulations which permit equal classification of tokenised assets and traditional assets.

In November 2020, the Australian Stock Exchange (ASX) announced that it will delay its DLT project to April 2022 due to some regulatory concerns. The objective of the project has been to replace the existing infrastructure for equity clearing and settlement with a DLT-based infrastructure.

Despite this development, the European Central Bank (ECB) warned that the current DLT setups which typically have a narrow focus and interoperability between venues and platforms will become necessary. ECB asked for clear and sound governance of services and functions in DLT setups. Currently, DTCC and Paxos are in the process of seeking further regulatory approvals in the US for additional tests which may imply more scrutiny of proposed DLT setups.

Clearing and settlement is a critical, high value and volume financial market function. Yet, in many countries, markets operate on infrastructures that require several days for clearing and settlement. In the meantime, there is ongoing work around the world to reduce the time frame for clearing and settlement. The potential benefits with shorter post-trade cycles and the need to avoid problems related to inefficient post-trade processes have provided avenues to banks, brokerage firms, and emerging technology companies like Paxos to experiment with DLT. In a parallel process, stock exchanges around the world are approaching DLT for clearing and settlement of both traditional and digital assets. More PoC of blockchain applications in financial markets are seen that suggest the industry may be closer to the instant settlement of security trades.



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