Some clothes designers say that brown is the new black. Being environmentally aware is so fashionable these days that one may say green is the new black. For young people, others say that, politics is the new black. For the securities industry, arguably, tokenisation indicates that black may be the new black. But, asks ERI’s Alan Goodrich, what form does this new black take for market participants, their organisation structures and underlying technology platforms?
Tokenisation, whether of conventional, or purely digital, assets implies the use of Blockchain to underpin the market. Blockchain technology is built upon consensus, i.e. a single version of the truth, with almost instant (atomic) settlement of transactions. This presents a number of challenges for market participants.
The traditional lifecycle of client order, market execution, and settlement (including provision of inventory or cash), with reconciliation of positions and balances between all participants, relies heavily on downstream, post-trade activities. However, trading tokens on a Blockchain is premised upon an entirely different philosophy of pre-funding. Before execution, both the cash and securities must be available. Real-time management of positions and balances is a pre-requisite.
In theory, executing trades on digital asset exchanges using Blockchain technology could mean that reconciliation between participants becomes redundant. In practice, however, from a regulatory and audit perspective, each participant must maintain an off-chain record of what it believes to be on-chain. So, reconciliation, in fact, not only remains a key requirement, but it also becomes something needed in real-time.
Indeed, offering clients the ability to trade tokenised securities through Blockchain-based digital asset exchanges with pre-funded trading and atomic settlement may require a complete organisational rethink. The reasonably well-understood and defined lines between front-, middle- and back-office functions become blurred to the point of non-existence. Every function requires access to real-time accurate information.
Many institutions still have legacy technology platforms built on the traditional front-, middle- and back-office model, with positions and balances being updated, sometimes across multiple systems, by “overnight” batch processing programs. Other institutions have digitally transformed their platforms by adopting a “best-of-breed” FinTech approach that was intended to support innovation and agility, but has ended up creating a new API-based spaghetti with the challenges associated with maintaining a single version of the truth in real-time.
Whichever camp an institution falls into, investment is likely to be required to deploy a new technology platform to underpin both the existing, traditional settlement processes of conventional securities, which, by-the-way, are inevitably moving to T+1 (or T+0), as well as the new “atomic”, digital, tokenised, assets.
Absolutely fundamental is for the new platform to provide a single, integrated system capable of real-time straight-through processing, position keeping and accounting, with no waiting for over-night batch processes to update positions and balances. In addition, the system must be flexible enough to allow an organisation to support both traditional front-, middle- and back-office functions as well as the new operational models that will be required, as the lines become blurred, to support the flow of tokenised securities.
The pre-funded trading and atomic settlement of tokenised assets, whether conventional or digital in nature, requires accurate real-time information. A single, integrated, core system must provide both the pre-trade reference system, to ensure the required funding and inventory are available, wherever they are needed and for whatever type of security and exchange, as well as the post-trade platform offering a single, off-chain, version of the truth that can be more easily reconciled with the on-chain market concensus.
Total cost of ownership (TCO) and time-to-market are critical decision criteria. A number of the newer generation of technology platforms lack maturity, take time to understand, implement or integrate with other services and are difficult to change once built. A proven solution, built on a modern, open, service-oriented architecture, that may be delivered with a close-fit “best practice” configuration can mitigate many of the risks and avoid the unwanted hidden costs of less mature offerings. In addition, highly efficient and targeted operating and business models can be delivered in a relatively short time-frame. This ensures a faster, reduced-risk implementation, a quicker time-to-market and lower TCO.
So, as suggested, black is actually the new black. The best solution is a proven one, with the maturity combined with modern flexibility and vision to offer a future-proof technology platform to support and service the needs of both conventional and tokenised securities’ market participants.
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