Author: Michael C. Bodson, President and Chief Executive Officer, Depository Trust & Clearing (DTCC)
- Digitalization offers post-trade market infrastructures an opportunity to help define a new market structure.
- Accelerating trade settlement to trade day plus one is one current major initiative.
- By collecting and digitally organizing trading information, post-market infrastructures help clients better understand how markets are behaving.
As digitalization transforms the global financial marketplace, firms responsible for clearing and settling transactions have an opportunity to help define a new market structure that combines the traditional securities of today with the digital assets of tomorrow.
Digital assets: transforming financial marketplaces
The development and implementation of cutting-edge technology, along with calls for greater efficiency and lower costs, and the perpetual drive to innovate to increase client value, all mean that market infrastructures must keep one foot in the present and another in the future.
Every day, post-trade organizations are fulfilling their daily mission – the seamless, flawless daily execution of global securities transactions – while identifying opportunities to reimagine processes and leverage technology to improve transparency, efficiency and risk management.
One significant example of this work is the move toward accelerating settlement in the United States from the current standard of trade day plus two days (T+2), which the industry adopted in 2017, to trade day plus one (T+1). That shortened cycle would reduce market risk and margin requirements – an average of over $13.4 billion is held in margin every day to manage counterparty default risk in the system – and trimming one day would enable firms to use those resources in other ways. The T+1 initiative has garnered support across many parts of the industry, and the US Securities & Exchange Commission has proposed an implementation date for the first quarter of 2024, though the industry is suggesting a bit later in that year.
Similar to the T+2 shift in 2017, accelerating settlement to T+1 will be complex and require extensive coordination and communication between market participants, industry stakeholders and regulators to ensure a seamless transition. As longtime advocates for the shift, the Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and the Depository Trust & Clearing Corporation (DTCC) are meeting with stakeholders, and this summer will be releasing a T+1 “playbook” that will outline steps for organizing teams, eliminating or streamlining manual processes, extensive testing and implementing the sweeping T+1 solutions across a broad spectrum of securities, financial products and services.
Accelerating settlement represents a major enhancement, but it’s only part of today’s post-trade story to create opportunities. For example, it’s become increasingly clear that data – and the ways in which operational data can be transformed into innovative analytics – is redefining relationships between front- and back-office operations and helping to transform markets.
While the trading of asset classes in global markets inherently results in fragmentation between competing exchanges and platforms, post-trade market infrastructures, through the clearing and settlement process, play a critical role in collecting and digitally organizing this disparate information. And as the volume of data increases, front offices, hedge funds, broker dealers and others are leveraging it to better understand how markets are behaving, recognize buying and selling patterns, and gain additional transparency into correlation, contagion, risk and valuation.
The back office, armed with this empirical information, is finding new opportunities to innovate with data assets, enabling them to become stronger partners to the front office. The significance of that information will continue to grow as market infrastructures extend the benefits of clearing to the buy side as well as to support securitized lending and Treasuries, along with developing rules and mechanisms for clearing and settling new digital assets. These products and rules will be essential to creating a sufficient level of transparency and integrity required to attract institutional participants.
Given the growth and potential scope of new digital assets, firms must be ready to evolve from the traditional model of exchanging securities for cash to a digital environment where clearing houses become “asset transfer facilitators” handling a variety of “asset for asset” transactions. Market infrastructures must be extremely flexible and ready to pivot quickly as these future transactions may include traditional fiat currency, Central Bank Digital Currencies (CBDCs), non-fungible tokens, stable coins and digital or native tokens. It’s likely that these assets and others will be used to pay for a traditional security or derivatives, or serve both as the asset and the payment received. And as tangible assets ranging from gold to artwork and baseball cards are tokenized – and those digital assets presumably will be used at some point to purchase physical goods as well as securities – investors and consumers must have confidence in the way the value of those assets is established, and in the regulation, governance and risk management standards to protect investors and the markets from digital scams.
In fact, the value of a digital asset or token is only as good the integrity of the location where that asset is stored. Market infrastructures, including DTCC, are investing to create platforms to support new models and mechanisms that will bring stability and security to digital markets in the same way they’ve protected the cash markets for decades. And today, we’re using distributed ledger technology, application programming interfaces and cloud to varying degrees in projects ranging from a prototype to explore how CBDC might operate in US clearing and settlement, to a Digital Securities Management platform to create infrastructure and standards for private markets, and the ION platform to accelerate settlement cycles while retaining benefits of netting and trade guarantees. All of these efforts provide a foundation for supporting transactions involving the digitalization and tokenization of assets, and for meeting our responsibility to hold and protect those assets.
What is the World Economic Forum doing about digital trade?
What is the World Economic Forum doing about digital trade?
The Fourth Industrial Revolution – driven by rapid technological change and digitalization – has already had a profound impact on global trade, economic growth and social progress. Cross-border e-commerce has generated trillions of dollars in economic activity continues to accelerate and the ability of data to move across borders underpins new business models, boosting global GDP by 10% in the last decade alone.
The application of emerging technologies in trade looks to increase efficiency and inclusivity in global trade by enabling more small and medium enterprises (SMEs) to repeat its benefits and by closing the economic gap between developed and developing countries.
However, digital trade barriers including outdated regulations and fragmented governance of emerging technologies could potentially hamper these gains. We are leading the charge to apply 4IR technologies to make international trade more inclusive and efficient, ranging from enabling e-commerce and digital payments to designing norms and trade policies around emerging technologies (‘TradeTech’).
Improving efficiency, lowering costs and mitigating risk are essential today and will remain so in the future. Even as we keep a foot in the present and another in the future, the mission of market infrastructures will not change: Our role is to hold and protect any representation of an asset, digital or otherwise, provide certainty, and guarantee the safety and security of the global financial markets.