Saturday, May 5, 2018

Post trade settlement using Blockchain

This application is the most sought-after utilisation of blockchain technology. Currently, many financial institutions are exploring the possibility of using blockchain technology to simplify, automate, and speed up the costly and time-consuming post-trade settlement process. Australian Securities Exchange (ASX) is already replacing their legacy "CHESS" system with Distributed ledger technology.
To understand the problem better the trade lifecycle is described briefly. A trade lifecycle contains three steps: execution, clearing, and settlement.
Execution is concerned with the commitment of trading between two parties and can be entered into the system via the front office order management terminals or exchanges.
Clearing is the next step whereby the trade is matched between the seller and buyer based on specific attributes such as price and quantity. At this stage, accounts that are involved in payment are also identified.
Finally, the settlement is where eventually the security is exchanged for payment between the buyer and seller.
In the traditional trade lifecycle model, a central clearinghouse is required to facilitate trading between parties which bears the credit risk of both parties. The current scheme is somewhat complicated, whereby a seller and buyer have to take a complex path to trade with each other. This complexity comes from the composition of various firms, brokers, clearing houses, and custodians but with Blockchain, a single distributed ledger with appropriately designed smart contracts can simplify this whole process and can enable buyers and sellers to talk directly to each other, without the requirement of a trusted third party.
Notably, the post-trade settlement process takes two to three days and has a dependency on central clearing houses and reconciliation systems. With the shared ledger approach, all participants on the blockchain can immediately see a single version of truth regarding the state of the trade. Moreover, a peer-to-peer settlement is possible, which results in the reduction of complexity, cost, risk, and the time it takes to settle the trade. Finally, intermediaries can be eliminated by making use of appropriate smart contracts on the blockchain.

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