Simplifying Trade Processing with DAML
Posted by Patty Maurer on Nov 4, 2020 7:36:10 PM

New E-book from IntellectEU and Digital Asset addresses the latest challenges around clearing and settlement

 

 

November 4

In collaboration with IntellectEU, we explored numerous ways distributed ledger technology (DLT) and DAML can transform securities services, including clearing and settlement, KYC processes, corporate actions and more. Through a series of blogs we are sharing our analysis, highlighting what DLT and DAML can do for you today. In part one of this two part series we are exploring the challenges of clearing and settlement.

Today, market infrastructures involve highly specialized actors to facilitate trading. One example is the clearing house, which acts as the central counterparty that enables anonymity in trading, transactions netting, and addresses part of the settlement risk. Another is the use of control accounts, which reduce the risk of bankruptcy or non-performance of counterparties.

Current trading & settlement infrastructure is neither efficient, cost-effective, nor foolproof

The usage of clearing houses generates significant trading costs and results in delays of trade settlement (currently T+2), while still not completely removing settlement risk. Likewise, control accounts require significant investment and continuous oversight. Opening one requires the time and expense of a tri-party negotiation of the securities intermediary’s unique legal agreement. Once operational, simply reconciling transactions to posted collateral becomes a large operational burden for entities with numerous transactions. As a result, control accounts are typically only used for highly sensitive or large transactions.

In addition, while there are many industry practices to improve settlement certainty and minimize delivery risk (such as security pledges, custodial account memo pledges, and control account agreements), they are rarely used because they create their own operational and cost-related challenges.

Markets can greatly reduce settlement times, costs, and risks using Committed & Simultaneous Settlement Workflows with Distributed Ledger Technology (DLT) on DAML

In a joint analysis conducted with Linklaters, Digital Asset developed and tested “committed settlement” - a workflow using DAML that would evidence certainty of settlement finality, lower margin requirements between counterparties, and reduce associated capital. This “committed settlement” method instantly creates control accounts, custodial account memo pledges, or security pledges on a distributed ledger. The solution was later termed the DA “Locking Library”:

The Locking Library solution commits available inventory for a delivery on T, defines ownership and actions over the inventory under predefined conditions, and instructs a locking of the inventory so only the T+N delivery for the settlement can be executed on that inventory.

As a result, the Committed Settlement Workflow:

  • • Reduces operation costs associated with margin, cash, and custody management;

    • Eliminates counterparty risk and capital costs:

    • Provides an immutable record of all transactions across all accounts at the ultimate beneficial owner (UBO) level (with auditable access to transaction information at the UBO level); and

    • Opens up new revenue generating opportunities. For example, beneficial owners could receive low-risk lending revenue from conditionally committing their inventory.

To learn more, download a free copy of “Digitally Transforming Securities Services” E-book, co-authored with IntellectEU.

Download the eBook

Click here to read part two of this blog series.

New E-book from IntellectEU and Digital Asset addresses the latest challenges around clearing and settlement

 

 

November 4

In collaboration with IntellectEU, we explored numerous ways distributed ledger technology (DLT) and DAML can transform securities services, including clearing and settlement, KYC processes, corporate actions and more. Through a series of blogs we are sharing our analysis, highlighting what DLT and DAML can do for you today. In part one of this two part series we are exploring the challenges of clearing and settlement.

Today, market infrastructures involve highly specialized actors to facilitate trading. One example is the clearing house, which acts as the central counterparty that enables anonymity in trading, transactions netting, and addresses part of the settlement risk. Another is the use of control accounts, which reduce the risk of bankruptcy or non-performance of counterparties.

Current trading & settlement infrastructure is neither efficient, cost-effective, nor foolproof

The usage of clearing houses generates significant trading costs and results in delays of trade settlement (currently T+2), while still not completely removing settlement risk. Likewise, control accounts require significant investment and continuous oversight. Opening one requires the time and expense of a tri-party negotiation of the securities intermediary’s unique legal agreement. Once operational, simply reconciling transactions to posted collateral becomes a large operational burden for entities with numerous transactions. As a result, control accounts are typically only used for highly sensitive or large transactions.

In addition, while there are many industry practices to improve settlement certainty and minimize delivery risk (such as security pledges, custodial account memo pledges, and control account agreements), they are rarely used because they create their own operational and cost-related challenges.

Markets can greatly reduce settlement times, costs, and risks using Committed & Simultaneous Settlement Workflows with Distributed Ledger Technology (DLT) on DAML

In a joint analysis conducted with Linklaters, Digital Asset developed and tested “committed settlement” - a workflow using DAML that would evidence certainty of settlement finality, lower margin requirements between counterparties, and reduce associated capital. This “committed settlement” method instantly creates control accounts, custodial account memo pledges, or security pledges on a distributed ledger. The solution was later termed the DA “Locking Library”:

The Locking Library solution commits available inventory for a delivery on T, defines ownership and actions over the inventory under predefined conditions, and instructs a locking of the inventory so only the T+N delivery for the settlement can be executed on that inventory.

As a result, the Committed Settlement Workflow:

  • • Reduces operation costs associated with margin, cash, and custody management;

    • Eliminates counterparty risk and capital costs:

    • Provides an immutable record of all transactions across all accounts at the ultimate beneficial owner (UBO) level (with auditable access to transaction information at the UBO level); and

    • Opens up new revenue generating opportunities. For example, beneficial owners could receive low-risk lending revenue from conditionally committing their inventory.

To learn more, download a free copy of “Digitally Transforming Securities Services” E-book, co-authored with IntellectEU.

Download the eBook

Click here to read part two of this blog series.

Topics:

Smart Contracts, DAML, blockchain, clearing and settlement, securities services

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