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.

Part VII International Securities, Including Markets and Clearing Systems, 19 International Settlement

This chapter provides an overview of “settlement” as the transfer of ownership or other interest in securities following the agreement to make such transfer in exchange for payment. It discusses settlement through a settlement system, which can only take place if the parties to the trade are members of the relevant settlement system or have arrangements with a system member that can procure settlement on their behalf. It also emphasizes the use of a settlement system that is generally regarded as giving the benefits of speed, efficiency, security, and finality advantages. This chapter talks about international central securities depositories (ICSD), which hold securities issued in a variety of different jurisdictions. It also highlights Clearstream and Euroclear as well—known examples of ICSDs.

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).

Measuring the Impact of a Failing Participant in Payment Systems

Banks and financial market infrastructures (FMIs) that are not able to fulfill their payment obligations can be a source of financial instability. This paper develops a composite risk indicator to evaluate the criticality of participants in a large value payment system network, combining liquidity risk and interconnections in one approach, and applying this to the TARGET2 payment system. Findings suggest that the most critical participants in TARGET2 are other payment systems, because of the size of underlying payment flows. Some banks may be critical, but this is mainly due to their interconnectedness with other TARGET2 participants. Central counterparties and central securities depositories are less critical. These findings can be used in financial stability analysis, and feed into central bank policies on payment system access, oversight, and crisis management.