Last week’s post looked at Payment vs. Payment. This week, Delivery vs. Payment or DvP, the exchange of securities vs. payment.
#3 Delivery vs. Payment (DvP)
Securities settlement today falls into one of three methods; i) via an ICSD, an International Central Securities Depository, for example Euroclear, Clearstream or SIX, ii) a CSD, a domestic Central Securities Depository or iii) a CCP, a Central Counterparty, which works in conjunction with a CSD.
In the major markets, these services are highly developed, so my sense is that there is not a lot to be gained purely on the settlement front. In markets where there is less advanced processing, a new platform using advanced technology may well offer potential. For example, in South Africa, there are two net settlement sessions per day. Nothing real time, no gross settlement.
Where there might be potential generally would be in linking the front-office functions to the back-office ones. Today, in many systems, the execution details have to be enriched with settlement information, which each market participant stores in its systems for every other counterpart, then both parties have to agree the trade and then send settlement instructions to where the trade is going to be settled.
Any improvements in a particular market will normally be funded by the local participants; infrastructure projects are never, ever cheap and the front-office is always reluctant to write the cheques. Anything new, even if it uses the Blockchain will still require investment, but the value proposition might just be better if:
- It represents a true end-to-end offering; execution, confirmation and settlement, with nothing happening after the trade is agreed. The Swiss will tell you they have had this for a while; true and they are very efficient at it, including the use of a CCP. But, it only works for some stocks, for some market participants and in some currencies.
- It can be used in multiple markets and multiple currencies; to be really effective, it would have to be a replacement for local CSD’s, because operating in parallel would simply divide up volume, leaving the old CSD’s with reduced volumes and the same costs. This would require local markets to give up some sovereignty over their market infrastructure; can be done, requires careful planning and politicking.
If such a multi-market, multi-currency platform were to be enabled, it would have a similar effect on custody as I have suggested in prior posts; it would divorce settlement from “liquidity”. In the case of securities, “liquidity”means both money and securities; the money to pay for what has been bought, or the securities to be delivered to meet the obligation for what has been sold.
Lessons Learned: End-to-end. If one platform can offer that for securities on a multi-market, multi-currency platform, then that is something that would be worth considering.
The folks at R3 Cev are heading in that direction; they have assembled a large cast of investors. But, and it is a big one, doing that really effectively means adding money to Blockchain. The regulators need to enable that.
Understanding Bitcoin and Blockchain
My own epiphany in matters Bitcoin and distributed ledger technology is the result of three independent sources: I am indebted to Emmanuel Mogenet at Google for his inspiring gift of a Bitcoin, to Richard Brown at R3 CEV for so readily sharing views and educating the latecomer and finally to Silicon Valley legend and LinkedIn CEO, Reid Hoffman for his seminal article in the May 2015 edition of Wired UK: “Reid Hoffman: Why the Blockchain matters.”
I also highly recommend reading an Oct 31st 2015 article in the Economist: “The great chain of being sure about things”. A key thought is around “certainty”; how the Blockchain can improve record keeping.
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