Digitization of financial market infrastructure: analyzing Deutsche Börse’s D7 post-trade platform and the call for dematerialization
There are a number of emerging themes driving the rapid innovation we see across global financial market infrastructure. However, digitization is at the forefront of these conversations as some of the world’s largest FMIs invest in the digitization of issuance processes and the dematerialization of securities.
Broad market network inefficiencies
The urgency surrounding these initiatives can be attributed to a few key challenges that have commonly defined market infrastructure. The first is how the markets themselves are set up, which entails various components (e.g., how counter-parties share records of value across each external system, as well as how internal organizations share information). This centralized operating model creates siloed, message-based communication, all of which compounds risk and costs associated with reconciliation, creating an inefficient market network between all participating entities.
The second challenge can be attributed to inflexible technology that does not support new digital asset opportunities at scale. Many of the systems underpinning the markets are legacy technologies that have not been updated since the early 2000s. This adds to the fracturing of processes as data is shared sequentially, and is not held, structured, or sold as commercial assets. Finally, with minimal innovation in the post-trade, settlement, and post-settlement environment, products are developed that improve highly specific functions, yet are unable to support future projects that transform the FMI core and address the inefficiencies defining broad market networks.
Focusing in on securities and issuance
Let’s examine securities and, in particular, the issuance process of these asset classes. To-date most securities are represented in physical, paper form and require a digital registry in order to eliminate the need of a physical certificate. This also requires issuers to maintain their own security registry. Additionally, the current state of issuance processes for any asset class is defined by error-prone, manual processes between multiple participants, leading to high costs and long lead-times. Paper-based issuance results in minimal standards, no rules for streamlining and lacks real-time visibility into the state of the asset, pricing and allocation, all of which creates bottlenecks and lowers opportunity for greater liquidity.
To accelerate digitization of these complex processes, Luxembourg, Germany, and Switzerland have provided the legal framework necessary to allow for the dematerialization of securities without any physical paper. These recent regulatory developments enable a fully digital alternative to physical issuance and securities processing, which led Deutsche Börse to launch its new D7 post-trade platform.
Analyzing innovation across Deutsche Börse
Tackling the challenges outlined above, Deutsche Börse is paving the way for an innovative future for European markets with a fully compliant, cloud-backed and DLT-ready platform that enables same-day issuance and paperless, automated STP for the entire value chain of issuance, custody, settlement, and asset servicing for digital securities. This platform offers a fit-for-purpose infrastructure that enables the creation and end-to-end processing of eWpG-compliant electronic securities, leveraging the so-called Digital Instrument (a digital description of electronic securities under German eWpG). The platform not only paves the way for same-day issuance (T+1h), but also provides a high STP rate, while significantly reducing legal and back-office costs. Deutsche Börse is at the forefront of a new digital generation of financial market infrastructure that enables new business models, products, and services based on new technology stacks that enable broad network efficiency.
Partnering with Digital Asset to seamlessly connect businesses
Digital Asset has been selected by Deutsche Börse as a strategic technology partner to build and support the D7 platform through all phases of development, such as a new central registry system that will form the basis for issuance and custody of dematerialized securities in compliance with the new legislation. The exchange will also leverage Daml smart contracts from Digital Asset to create and process Digital Instruments, in order to manage the securities alongside the entire value chain. Digital Asset will also support features of D7 related to distributed networks and DLT.
This partnership and the launch of the D7 platform using Daml is another step forward in realizing our vision of building the Global Economic Network of seamlessly interconnected businesses. Digital Asset delivers software and services that create thriving, interconnected ecosystems and enables a number of market infrastructures, financial institutions, and service providers worldwide to share records of value with full transparency, without sacrificing privacy, through its multiparty application platform—Daml.
To learn more about the D7 post-trade platform from Deutsche Börse, click here and read the recent press release.
To learn more about Digital Asset and the suite of software and services available powering the world’s largest financial institutions, click here.