What’s next for financial market infrastructure?
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 given unprecedented momentum for change, with many companies completely rethinking the way they work – often through the transformation of existing infrastructure – in order to adapt to the ‘new normal’.
In the past two months alone, the world has witnessed a quiet revolution in financial markets and the technology that powers them. The Swiss stock exchange, SIX Group, launched SIX Digital Exchange – SDX, a fully integrated trading, settlement and custody infrastructure regulated by FINMA. This is a major milestone in the transformation of systemically important financial market infrastructures, setting the standard for digital asset exchanges, central counterparties (CCPs) and central securities depositories (CSDs) to l ‘to come up.
Technology for change
Digital exchanges are now able to support the post-trade lifecycle with distributed ledger technology (DLT) and provide a unique and seamless workflow and customer experience between trade and settlement.
This includes execution to the point of atomic settlement included in the general ledger, using cash delivered by the exchange’s local central bank. From a settlement risk and cost perspective, this is revolutionizing the post-trade lifecycle, completely overhauling the spaghetti of processes and manual interventions that make up the T + 2 settlement proposed today, accelerating this offering to the next level. ‘at T + 1, and finally almost instantaneous as needed. .
Market players can design entire platforms to support a wide range of digital assets over time. This includes the listing, trading and settlement of traditional capital market assets such as bonds, stocks and related derivatives, as well as a wide range of new and emerging asset types such as private equity. , real estate, infrastructure and fine arts. All in a fully regulated environment.
Enabling a 24/7 global financial market
Beyond traditional national exchanges, which trade at limited times and with a limited number of national and super-regional members, the digital switch-over means that it is now possible to create a truly global exchange that has the capacity to function. 24 hours a day and to a global audience. By backing these digital exchanges with bespoke DLTs, they can combine the “run to settle” lifecycle while increasing the hedging capacity of asset classes and widening the open trading window. This is undoubtedly one of the most significant changes that we will likely see in the infrastructure of financial markets in our lifetime.
It is transformative, not only because it allows the entire life cycle of assets to be recorded in the general ledger, from creation to maturity, but also because it finally frees sites from the chain. to a single geography or a single watershed. Members can now access a wider range of assets, rather than just those who reside in a particular jurisdiction. They can now access a truly global franchise – offering listing, trading, custody and settlement across a very wide range of assets and to a diverse global audience.
Financial markets play a crucial role in the allocation of capital in the real economy and it is vital for the health of the broader financial services that they operate in a fair, robust and efficient manner. To do this, market participants need resilient and profitable post-trade processes and members must have the ability to transact securely, knowing that their data and activities remain completely private and immutable. DLT does this – but it can’t work on its own.
Collaboration between financial market infrastructures, financial institutions, regulators and fintechs is crucial to keep members safe and build an infrastructure that actually works for all parties. The writing is on the wall – interoperable digital and traditional worlds are essential to unlock the next stage of financial market infrastructure. When established financial institutions and tech disruptors work in partnership, real innovation happens. This change is not in months or years – it is happening now.
The technology is ready, regulators are driving the change, and early adopters are already online. This is the call to all financial market innovators to embrace this transformation.