#Distributed #Ledger #Technology for Securities Clearing and Settlement: Benefits, Risks, and Regulatory Implications.

Abstract.
This article outlines the benefits and risks of the distributed ledger technology (DLT) for the clearing and settlement of exchange-traded and OTC securities, followed by a description of the technology’s potential role for central counterparties and central securities depositories. Although the industry and scholars are attempting to solve the technological and operational issues that DLT systems still face, outstanding legal risks are such that the financial industry is asking for more regulatory guidance and intervention. This article wants to contribute to the public policy debate by presenting potential regulatory barriers that may have to be removed for DLT to be fully adopted. In addition, it identifies areas requiring an update of the legal framework in order to address certain prudential and conduct risks that this technology could introduce.

Introduction.
Distributed ledger technology (#DLT), of which the blockchain technologyFootnote1 is the best known example, has attracted significant interest from the financial industry and academia. DLT gained notoriety by being used for the trading of cryptocurrencies, such as Bitcoins, which are issued and validated by the system users rather than by a central authority. Since the deployment of virtual currencies, the financial industry has been investigating whether this technology can be applied to securities markets in order to create a more efficient market, compared to the usage of ledgers based on classical double-entry bookkeeping.

According to Goldman Sachs (2016), DLT could reduce transaction costs of insurance underwritings by $2–4 billion in the USA alone and the costs related to securities clearing and settlement would decrease by $11–12 billion. An analysis of Banco Santander, Oliver Wyman, and Anthemis Group (2015) suggests that DLT could reduce banks’ infrastructure costs attributable to cross-border payments and trading of securities by $15–$20 billion. The World Economic Forum (2015) even estimates that by 2027, up to 10% of the value of the global GDP will be stored on blockchains.

Although financial institutions have yet to demonstrate that DLT is a viable and sustainable solution to cover the complete securities trade cycle (i.e. trading, clearing, and settlement), they developed several proofs of concept in particular nichesFootnote2 of the trading and post-trading ecosystem. A non-exhaustive list of examples: the Australian Stock Exchange cooperated with Digital Assets to use DLT for the clearing and settlement of equity transactions (McDowell 2017); Nasdaq and SEB constructed a mutual fund trading platform based on the blockchain technology (Parsons 2017); Overstock.com launched a closed-system trading platform for the sale of its own proprietary blockchain (Ryan and Donohue, 2017), Nasdaq launched Linq to enable private securities issuance (Peter and Vishnia, 2016), the French central securities depository (CSD) ‘ID2S’ applies the blockchain technology to issue French commercial paper, and the Canadian Securities Exchange developed a DLT securities clearing and settlement platform to allow companies to issue equity and fixed income securities via security token offerings (McDowell 2018).

With respect to the usage of DLT to cover the complete securities trade cycle (i.e. from trading to clearing and settlement), it is not yet clear from previous literature or observed proof of concepts whether DLT would in fact have a large impact on the trading (i.e. the agreement to buy and sell securities) of securities itself. According to the International Securities Services Association (ISSA, 2019), no full-scale DLT system is fully live so the wider implication of DLT in terms of business model impacts is not yet known. According to some industry participants (see e.g. Goldman Sachs, 2016; Euroclear, Oliver Wyman, 2016), and scholars (see e.g. Fico, 2016), trading venues or other trading facilities are likely to be less affected as participants of these infrastructures still need to find counterparties, which is not going to change when using DLT. Also, according to Peters and Panayi (2016), buyers and sellers could act first through brokers (i.e. trade level) and then create a transaction for the transfer of that amount of the asset, which is then transmitted to the network and verified. Yet, given the characteristics of the technology (see infra), post-trading (i.e. clearing and settlement) and trading could become more intertwined in a DLT environment compared to the currently sequential processing of securities. Some scholars even argue that the transaction phase and clearing-and-settlement phase will be the same (Malinova and Park, 2016). This would imply that there is in fact no longer a distinction between trading and post-trading and the role of post-trading market infrastructures gets strongly…

During this seminar we will explore the functioning of key legal aspects of the EU’s post trade securities market regime. Post-trade is continuously and rightly being mentioned as one of the main priorities for creating truly integrated capital markets in Europe. Nonetheless, progress on European initiatives in this area is notoriously slow.

Recognising these challenges, the European Commission will imminently be launching public consultations on the functioning of the Settlement Finality Directive and the Financial Conglomerates Directive. Both pieces of legislation have been critical to EU market integration but have now been in force since the early 2000s. We are also expecting an important public consultation on the CSDR governing the authorisation regime and oversight of central securities depositories.

Among the questions the panel will be discussing are: whether the existing legal regimes are still appropriate for new technologies; how the legislation interacts with current insolvency regimes and the BRRD; how the netting provisions in the Collateral Directive are working in practice; as well as the impact of the rules on settlement discipline under the CSDR.

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DISCLAIMER: All my content is just for entertainment purposes only. Any opinions expressed are just my own. I am not a financial adviser. I advise everyone to not take anything I say at face value, but to always do your own due diligence and research before investing.

#ISO20022 #XRP #SWIFT #XLM #crypto #cryptocurrency

MIT 15.S12 Blockchain and Money, Fall 2018
Instructor: Prof. Gary Gensler
View the complete course: https://ocw.mit.edu/15-S12F18
YouTube Playlist: https://www.youtube.com/playlist?list=PLUl4u3cNGP63UUkfL0onkxF6MYgVa04Fn

Prof. Gensler leads a discussion on clearing and settlement systems, blockchain technology applicability, and blockchain technology projects.

License: Creative Commons BY-NC-SA
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