Clearing Houses and Blockchain
Welcome to February’s edition of Tokeny Insights. This month we take a closer look at clearing and settlement and how decentralized technology can alleviate existing problems in this stage of a financial instrument.
Clearing houses act as central counterparties to both sides of a trade. Due to rules and regulations, these actors are required to maintain records of information around transaction and counterparty risks, along with the cost of reconciling each party’s data at each step of the contract execution. This results in a process that leads to long settlement periods of T+2 or T+3, human error and a costly allocation of resources.
Decentralized technology can radically improve this process by acting as the shared and resilient infrastructure that can be instantly accessed by authorised parties. The use of smart contracts pave the way for actors to verify ownership, confirm trade matching and record transactions in an automated and near real-time fashion. Furthermore, decentralized technology can act as a shared registry of transactional data and a counterparty to both sides of the trade and dramatically improve the settlement and clearing process.
So far, we have successfully launched a set of tools for the primary issuance, identity management and post servicing of securities. Huge improvements can also be brought to post-trade venues. With the WEF recently announcing a framework for CBDCs, it is only a matter of time before these improvements will be realised.
