Can blockchain play a role in faster trade settlement cycles?
One of the big attractions of T+1 securities settlement cycle is going to be the reduction in the number of trades that are not settled within 24 hours. It should lower trading costs and reduce counterparty risk. But considerable technological challenges remain on the road to T+1.
Bear in mind that in 2017, when the US transitioned to T+2 it took three years. This was also a less complex challenge than that currently being contemplated for T+1. The new changes are going to place much more pressure on legacy technology. T+1 will require real-time, same day processing. Overnight batch processing is not going to be enough this time around.
T+1 also holds out the prospect of the eventual transition to T+0 settlement. T+0 may not need to provide instantaneous settlement but could offer the prospect of same day settlement. Regulators are currently being forthright, ruling out a transition to T+0 in the near term.
Can T+0 be achieved realistically? One of the big issues is going to be the funding of trades – can counterparties demonstrate in an almost real-time environment that a trade is fully financed?
Could blockchain hold the keys to the T+0 kingdom?
One way through this maze could be via the use of blockchain, allowing systems to share information via distributed ledger technology. This could also radically reduce the cost of reconciliations.
Back office professionals now refer to this eventual goal as ‘atomic settlement’; a term that originated in the cryptocurrency markets. The ongoing need for netting – trade offsetting – at least by end of day still represents an obstacle for atomic settlement, however.
“Atomic settlement, originating from the crypto and blockchain realm, is gaining traction in financial services, particularly within the foreign exchange (FX) world”, says Johnny Fry, Head of Digital Assets Strategy at ClearBank Group. “Some herald it as a game-changer, with the potential to enable almost real-time settlement.”
The DTCC has been exploring the possibilities of blockchain within trade settlement – in 2022 it launched a solution to digitize privately held stocks. This supports Reg A and Reg D unlisted securities in the US. The move by the DTCC came as a result of the massive increase in trading of private securities. The platform may be extended to other assets like funds, debt and real estate in the future. It could go further.
As of February 2024 the official line from the DTCC was that blockchain would not be playing a role in the current transition to T+1. However, DTCC is not ruling out the use of tokenization in areas of the market which are considered less developed. One area is ETFs where blockchain could potentially achieve efficiencies – e.g. through improving the create-redeem processes and data distribution.
The DTCC is also known to be road testing solutions on a sandbox basis with fund managers and wealth managers, as well as fund administrators and custodians. This has included putting NAV data on a public blockchain.
Tokenization could also transform the role of central securities depositories and central counterparties with smart contracts automating much of the servicing functionality. The DTCC, Clearstream and Euroclear have all argued for their ongoing role as the central coordinators in the emerging digital assets landscape.
It is worth noting some of the early steps being made already. Last year Euroclear issued the first bond on its Digital Securities Issuance platform. This was a EUR 100m digitally native note from the World Bank and was listed on the Luxembourg Stock Exchange. It remains linked to Eurclear’s existing settlement infrastructure which means it can settle in the same way as a traditional security. It demonstrates a significant balancing act between the traditional realm of securities processing and the new digitally native one.
Truss Edge, and their dedicated asset management platform have evolved their technology and operations to meet the exacting requirements of the clients they support. An integrated T+1 reconciliation solution comes as standard, reconciling all trade, cash and administrator activity.
“We work with our clients and try to anticipate their requirements ahead of time, with that in mind we already offer T0 reconciliation of trade activity, we are also able to calculate settlement values on T0“ says Jay Duffy, CEO at Truss Edge.