Global Custodian Securities@Sibos 2019 - Page 7

[ S E C U R I T I E S M A R K E T S T R U C T U R E ] “Disruptive technologies could of course bring a number of efficiencies to traditional market practices, but even the established providers are fast realising that innovation is not a straightforward enterprise.” THOMAS ZEEB, SIX gin, although experts believe the liquidity benefits offered by tokenised assets could mitigate this problem as there would be a much deeper pool of collateral available, enabling participants to optimise and post margin at greater velocity. Innovating and managing risk Perhaps one of the biggest misconcep- tions in the recent debate about inno- vation in financial services is that its execution should be as streamlined as possible. While being first to market does have its positives, it is not always the correct decision, particularly for system- ically important institutions like stock exchanges. The use cases for tokenised assets are well-documented, but it is not yet possible for stock exchanges to devel- op a fully-fledged and scalable product supporting these instruments until there is some sort of regulation or legislation in place, providing users with basic protec- tions. At present, different markets have their own bespoke approaches to regulat- ing digital assets, making international consensus very unlikely in the foresee- able future. SIX is, however, engaging in proactive dialogues with regulatory bodies to create a sensible legal frame- work for tokenised securities, ensuring the rules concerning investor protections are robust, certifying the underwriting provisions are meaningful and credible, and validating that these new financial instruments correspond fully with the underlying tangible assets. The latter risk is a particularly worri- some one. For example, a bank providing financing today will accept UK Gilts as collateral from the borrower meaning its risk exposure is to the broader UK econ- omy. If that same bank were to accept a UK Gilt in tokenised form as borrower collateral, its risk exposure could be to the institution which issued the token and not to the UK economy. This could pose challenges in the event of a market correction. As such, it is crucial there are legal assurances guaranteeing tokenised securities are subject to the same rules and ownership rights as the assets, for which they are acting as a proxy. Infrastructures move with the times It is too early to tell which innovations will reach critical mass, while it is equally difficult to assess what problems these technologies can actually solve over the long-term. However, SIX firmly believes that different technologies will interop- erate with each other to bring efficien- cies into end-to-end trade processing. As such, innovation should be seen as a holistic, group-wide effort and not as a siloed initiative. For example, blockchain could be used to facilitate concurrent trading and settlement while AI software may be applied to support risk and com- pliance monitoring by flagging up invalid or suspicious transactions. Evolving the post-trade With settlement potentially happening in lockstep with trading, some experts are speculating post-trade activities could eventually be subsumed by stock exchanges, although this is a view not endorsed by SIX. Stock exchanges and post-trade infrastructures are entrust- ed with different roles, with the latter performing a critical market oversight function. A merging of the two risks creating a situation rife with conflict of interest, which would be unacceptable for market users. Instead, post-trade will not be disintermediated, but will evolve, and acquire new responsibilities as technolo- gy changes. Until rudimentary standards and agreed-upon frameworks are crystallised, it will be difficult for stock exchanges to create an ecosystem which facilitates disruptive technologies – be it DLT, AI or digital assets. This means stock exchanges and other infrastructures need to be taking a lead in developing industry frameworks underpinning these technol- ogies if they are to succeed in reforming financial markets and enhancing the user experience. January 2019 Securities@Sibos 7