Globally, OTC trade settlements are prone to a host of challenges that include delays, operational inefficiencies due to involvement of multiple intermediaries, continuous exchange of messages between these intermediaries and higher transaction costs. This problem is further accentuated by duplication of information in siloed, legacy platforms and lack of access to real-time changes in trade status, thereby leading to a need for daily reconciliation routines and manual intervention. More importantly, delays in settlements result in increased counterparty risk and in collateral being locked up to service margin obligations arising from unsettled trades. Most regulators are therefore pushing for settlement reforms, including shortened settlement cycles, mandating CCPs, and increased transparency for all stakeholders.
Re-imagining Trade Settlements on Blockchain
The above challenges can be addressed with a private, permissioned blockchain solution that can be set up and run by market infrastructure providers such as the stock exchange/central securities depository/central banks as they can be natural providers of such an ecosystem. The Settlements facilitates Delivery versus Payment (DvP) settlement of tokenized assets held on the ledger, with each organization operating as nodes thereby ensuring increased transparency and immutability of data. The solution comes with Smart Contracts that enable validation and matching of off market trades as well as real-time, final, irrevocable settlement of these assets on the distributed ledger.
- Ability to process and settle transactions real-time (T+0)
- Increased transparency and improved settlement efficiencies
- Potential to disintermediate intermediaries, leading to simpler process flows, lower costs
- Reduced systemic risk, as the distributed nature of blockchain eliminates single point of failure
- Eliminates data duplication and hence reduces reconciliation efforts with market participants
- Elimination of messaging overheads, real-time access to holdings and transactions
- Ensures data integrity with cryptographic encryption of data, making it immutable
- Provides easy connectivity to the blockchain ecosystem, thus facilitating collaboration
- Administration and monitoring of the ecosystem through the Command Center
- Restricted access to ensure greater data security, combined with robust Data privacy features