By Todd McDonald, Co-Founder, R3
From CBDCs to smart contracts, financial services have seen significant disruption and development over the past 18+ months. The pandemic has provided an unprecedented impetus for change, with many businesses completely rethinking their ways of working – often through the transformation of legacy infrastructures – in order to adapt to the ‘new normal’.
In the last couple months alone, the world has witnessed a quiet revolution in financial markets and the technology which powers them. The Swiss stock exchange, SIX Group, launched the SIX Digital Exchange – SDX, a FINMA-regulated, fully integrated trading, settlement and custody infrastructure. This is a major turning point in the transformation of systemically important financial market infrastructures, setting the standard for digital asset exchanges, central counterparties (CCPs) and central security depositories (CSDs) in the future.
Technology driving the change
Digital exchanges are now able to underpin the post-trade lifecycle with distributed ledger technology (DLT) and deliver a single, seamless workflow and client experience between trading and settlement.
This includes execution up to and including the point of atomic settlement on ledger, using cash delivered by the exchange’s local central bank. From a settlement risk and cost perspective, this revolutionizes the post-trade lifecycle, completely overhauling the spaghetti of processes and manual interventions that make up the T+2 settlement offered today, accelerating that offering to T+1, and eventually near instantaneous as required.
Market participants can architect entire platforms to support a broad range of digital assets over time. This includes the listing, trading and settlement of traditional capital markets assets such as bonds, equities and associated derivatives alongside a broad spectrum of new and emerging asset types such as private equity, real estate, infrastructure and fine art. All within a fully regulated environment.
Enabling a global 24*7 financial market
Moving beyond traditional domestic stock exchanges, which trade on limited hours and to a limited number of domestic and super-regional members, becoming digital means it is now possible to create a truly global exchange that has the capacity to operate round the clock and to a global audience. By underpinning these digital exchanges with tailor-made DLT, they can combine the ‘execute to settle’ lifecycle alongside increasing the capacity of asset class coverage and expanding the open trading window. This is undeniably one of the biggest changes we are likely to see in financial market infrastructure in our lifetime.
This is transformative, not only because it makes it possible to bring the entire lifecycle of assets onto the ledger, from inception to maturity, but also because it finally liberates venues from being shackled to a single geography or catchment. Members can now access a wider range of assets, rather than only the ones that reside within a given jurisdiction. They can now access a truly global franchise – delivering listing, trading, custody and settlement across a very broad range of assets and to a diverse global audience.
Financial markets play a crucial role in capital allocation into the real economy and it is vital to the health of wider financial services that they function fairly, robustly and effectively. To do this, market participants need resilient and cost-efficient post-trade processes and members need to have the ability to transact safely, secure in the knowledge that their data and activities remain completely private and immutable. DLT enables this – but it cannot work alone.
Collaboration between financial market infrastructures, financial institutions, regulators and fintechs is crucial to provide security for members and build infrastructure that genuinely works for all parties. The writing is on the wall – interoperable digital and traditional worlds is key to unlocking the next step in financial market infrastructure. When established financial institutions and technology disruptors work in partnership, real innovation happens. This change is not months or years away – it’s happening right now.
The technology is ready, regulators are piloting the change and early adopters are already going live. This is the calling to all financial markets innovators to embrace this transformation.