Secure Transaction Management for Securities Trade Settlement

Case Snapshot Outlining Potential Benefits for Capital Markets

  • Pre-Trade

  • Trade

  • Post-Trade

  • Custody & Securities Servicing

Pre–Trade

  • Pre-validation, transparency, & verification of holdings
  • Reduced credit exposures
  • Mutualization of static data
  • Simpler Know Your Customer (KYC) via look-through to holdings

Trade

  • Secure, real-time transaction matching, & immediate irrevocable settlement
  • Automatic delivery vs payment (DVP) transactions on cash ledger
  • Automatic reporting & more transparent supervision for market authorities
  • Higher anti-money laundering (AML) standards

Post–Trade

  • Real-time visibility of trade status/settlement
  • Reduced margin/collateral requirements
  • Faster novation & efficient post-trade processing
  • Fungible use of assets on distributed ledger as collateral
  • Auto-execution of contracts

Custody & Securities Servicing

  • Primary issuance directly onto distributed ledger
  • Automation & de-duplication of servicing processes
  • Richer central datasets with flat accounting hierarchies
  • Common reference data
  • Fund subscriptions /redemptions processed automatically on the distributed ledger
  • Simplification of fund servicing, accounting, allocations, & administration

In a multi-tier securities custody model, the Sky Platform can mitigate settlement latency. This is achieved by reducing the time required to align data prior to settlement, as the use of distributed ledger technology (DLT) would require parties to collaborate to maintain the same underlying data set.

As information and accounts are siloed between different banks or custodians, settlement requires execution and reconciliation between each layer of the holding chain. The Sky Platform could reduce inefficiencies associated with this process because information only needs to be recorded in a database maintained and accessed in a single distributed ledger, rather than in each separate database layer through the holding chain.

The Sky Platform could also enable enhanced visibility by providing transparent real-time data to users. It could remove the need for data enrichment (such as aligning trade data with settlement data), reconciliations and disputes amongst counterparties. Parties could selectively reveal trusted data to another counterparty ahead of trade time to provide greater certainty of their own worthiness, thereby reducing risk and/or credit exposures. Furthermore, assets not typically traded (such as invoices) could be more easily considered as reliable sources of value to be used as collateral, or as a demonstration of worthiness.

More efficient settlement of transactions and processing would occur as everyone sees the same data, and updates are quickly circulated across the market. Cash transactions could settle in (near) real-time since the trade is complete when the next update to the Sky Platform is done, embedding the transfer of ownership of an asset or other agreement. Since all participants would now use the same underlying dataset for trade-related processes, the Sky Platform could reduce the scope for data errors, disputes and reconciliation lags, speeding up the end-to-end process.

Securities transaction

In this scenario pre-validation occurs when Client A and Client B are matched on an execution venue (e.g., exchanges), and automatically verify that the other has the means to complete the transaction (e.g., Client A demonstrably owns the security on the asset ledger, and Client B demonstrably owns cash on the cash ledger). Client A and Client B jointly ‘sign’ the transaction by applying their private keys to unlock their asset or cash, and then by transferring ownership to the recipient via their public key. The signed transaction is broadcast to the distributed ledger to be validated and recorded in the next update, along with a simultaneous update to a cash ledger.

Asset servicing

For new issues, assets are issued directly onto the asset ledger. In fact, securities themselves could be unbundled so that the individual cash flows, and the rights they encapsulate, could be transferred separately.

Mandatory events and distributions can be managed via smart contracts embedded within the securities. Complex events can be structured as simple Delivery Versus Payment (DVP) transactions between issuers and investors. Fund managers will have perfect visibility of their pools of investments in securities (the asset side of their balance sheet), and will be able to manage investors’ holdings in their funds via the fund ledger.

With flat accounting, the multiple custody layers are shrunk to a single function. Currently, a single security may be held in as many as five or six layers of custody (stockbroker, sell-side bank, local custodian, global custodian, Central Securities Depository, etc.) each with their own accounting views. Here the asset is held by a form of wallet provider recording the final beneficial owner.

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