Applicability of Blockchain Technology in Securities Settlement

Technological advancements are often adopted to financial markets to improve their operations and safety. Blockchain technology has been recognized as one of the potential technologies to be utilized in capital markets. The goal of this article is to evaluate the applicability of using the blockchain technology in securities settlement process. First, the theoretical background of blockchain technology is reviewed and the current financial market infrastructure is examined. Then Central Securities Depositories Regulation and the current securities settlement processes are examined. Blockchain applicability framework designed by Gourisetti, Mylrea and Patangia is applied to assess the blockchain technology’s applicability to securities settlement. The results suggest that blockchain technology can be applied to securities settlement, and the used blockchain type should be a private blockchain with Proof-of-Authority consensus mechanism. A blockchain architecture model, based on a model provided by Zhuang, Chen, Shae and Shyu, and potential node structure for securities settlement are developed, taking into account the existing literature on blockchain technology, financial markets, and Central Securities Depositories Regulation. The proposed blockchain architecture model and node structure are then evaluated against scholar expected benefits and drawbacks of using blockchain for securities settlement and cross-border settlement efficiency. The evaluation reveals that the proposed blockchain technology model can potentially improve some of the current securities settlement issues, such as costly reconciliation and difficult cross-border securities settlement. At the same time, using blockchain technology in securities settlement would be challenging because the practical implementation time would be long and would require market-wide commitment. The main artefacts of this article are the proposed blockchain architecture model and node structure that would allow securities settlement processes to be executed using blockchain technology.

Prospects and limitations in the modernization of securities settlement operations in Ukraine

The article points to the critically insufficient compliance of Ukraine's stock market infrastructure with the relevant international recommendations, first of all in the segment of securities settlements. The author states that despite the creation of market infrastructure in Ukraine and the possibility to avoid problems related to the evolutionary errors, the market participants face numerous difficulties, such as risks in legal empowerment and in the activities of key infrastructure actors, limited competition, excessive transaction costs, ongoing defragmentation of the system of depository accounting, as well as inconvenience and limitations of the existing risk management systems. The study on the evolution of securities settlement models in Ukraine revealed that the radical reform of infrastructure in 2013 led to contradictory consequences, in particular, the abuse by the settlement bank and the central counterparty of its monopolistic positions, active participation of this monopolist in high-profile market abuse, stagnation in clearing and settlement technologies, and a slowdown in the development of the derivatives market. It was found that, despite lengthy discussions, the updated legislation in the field of organized capital markets, which is designed to implement a number of EU laws and should enter into force in 2021, does not really rectify the problems in the existing infrastructure, in particular due to a rather dubious proposed procedure of securities settlement and conservation for a few more years of the monopoly in the field of settlement and clearing services. It is substantiated that Ukraine has constructive practical experience and skills that can allow to implement the best international standards for building a system of cash settlements in "central bank money", organically integrated into Ukrainian payment system and able to adapt to European payment systems.

Prospects and limitations in the modernization of securities settlement operations of in Ukraine

The article points to the critically insufficient compliance of Ukraine’s stock market infrastructure with the relevant international recommendations, first of all in the segment of securities settlements. The author states that despite the creation of market infrastructure in Ukraine and the possibility to avoid problems related to the evolutionary errors, the market participants face numerous difficulties, such as risks in legal empowerment and in the activities of key infrastructure actors, limited competition, excessive transaction costs, ongoing defragmentation of the system of depository accounting, as well as inconvenience and limitations of the existing risk management systems. The study on the evolution of securities settlement models in Ukraine revealed that the radical reform of infrastructure in 2013 led to contradictory consequences, in particular, the abuse by the settlement bank and the central counterparty of its monopolistic positions, active participation of this monopolist in high-profile market abuse, stagnation in clearing and settlement technologies, and a slowdown in the development of the derivatives market. It was found that, despite lengthy discussions, the updated legislation in the field of organized capital markets, which is designed to implement a number of EU laws and should enter into force in 2021, does not really rectify the problems in the existing infrastructure, in particular due to a rather dubious proposed procedure of securities setrtlement and conservation for a few more years of the monopoly in the field of settlement and clearing services. It is substantiated that Ukraine has constructive practical experience and skills that can allow to implement the best international standards for building a system of cash settlements in "central bank funds", organically integrated into Ukrainian payment system and able to adapt to European payment systems.

A Securities Settlement Model Using Blockchain Technology for Central Securities Depository

Post-trade securities settlements entered the electronic age between 1980 and 2000. The introduction of technologies such as secure electronic messaging, and improvements in database technology, enabled the inception of central securities depositories (CSDs) as trusted third parties or intermediaries within the securities settlements post-trade landscape. The study reported in this chapter has a focus on CSDs and the application of the blockchain technology to securities settlements. The objective is to develop a model for securities settlements using blockchain technology for a CSD, as currently, globally, no CSD has introduced a production-ready blockchain-based solution for securities settlements. A conceptual model was created from the reported literature that was evaluated by international post-trade securities professionals. The findings have resulted in the acceptance of the main components of the model, with a focus on the cost of the solution, and with the identification of prerequisites to such a solution (e.g., legal/regulatory enablement).

Chile

The BCCh is considering broadening access to its services beyond commercial banks and some Financial Market Infrastructures (FMIs). The services include settlement accounts, intra-day liquidity, standing deposit and lending facilities, and eligibility for ELA. Banks have always had access to these services, while Central Counterparties (CCPs) and the Securities Settlement System (SSS) were granted access to a settlement account in 2009. The BCCh is considering extending its services to various types of Nonbank Financial Institutions (NBFIs) to enable it to more closely manage and mitigate financial stability risks.

The Economics of Distributed Ledger Technology for Securities Settlement

We apply economic principles to understand how distributed ledger technology (DLT) might impact the innovation process and eventual market structure in the security settlement industry. Our main conclusions are that: i) Although DLT has the potential to significantly reduce costs in securities settlement, implementation is challenging, ii) technological innovation in the post-trade industry is more likely to succeed with some degree of coordination, which could be facilitated by the relevant authorities, and iii) DLTbased securities settlement is likely to be concentrated among few providers which, absent any regulation, could result in inefficient monopoly pricing or efficient price discrimination with service providers capturing much of the market surplus

Singapore

Singapore’s financial market infrastructures (FMIs) have continued to operate safely and efficiently since they were assessed in the FSAP of 2013. The Monetary Authority of Singapore (MAS) has taken important steps to address the recommendations made for capital market FMIs. Remedial actions were implemented or are in progress for the two central counterparties. The privately-operated securities settlement system has moved its SGD money settlements for equities and debt securities to settle at the MAS in December 2018. Two additional central counterparties and one trade repository have also entered the FMI landscape. MAS has signed a supervisory cooperation on crisis management arrangements with the U.S. authorities.