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Securities and exchanges professional here, although based in Europe (no affiliation with T0 or any related platform). Settlement is the process by which secur

by dbs 11y ago

Securities and exchanges professional here, although based in Europe (no affiliation with T0 or any related platform). Settlement is the process by which securities are delivered against payment, from one counter-party to another (the seller delivers the securities, the buyer delivers the cash). What happens today is that both clearing and settlement are necessary because the speed of trading is much faster than the cycle time for completing an underlying transaction (delivery versus payment), usually in T+2 or T+3 days. At the middle is the CSD - Central Securities Counterparty - that intermediates the delivery versus payment transactions and guarantees that when shit hits the fan (when one of the parties fails to deliver) the money is on the table for the other. Settlement is costly: the CSD charges both parties for this "matching & insurance" service; sometimes the settlement operation represents the largest share of the costs involved in a transaction (trading + clearing + settlement; and after that you have also custody costs). And usually settlement is only available for very liquid, exchange traded securities. Because the CSD my have to put money on the table they can do it only in securities they know they can get their money back. If you are a broker and there is no CSD you have to trust in the counterparties you deal with to minimize fail-to-deliver risk. Which brings a lot of inefficiency to these markets. With smart contracts, if "the trade is the settlement" (which is a very neat way of expressing it!) it seems you no longer need to use traditional settlement services. The trade only occurs when you deliver the securities. And you have no limitation in the number of securities you can trade. Less costs, less time to deliver, same level of risks as in with a CSD.(EDIT: broader, unfulfilled markets). Seems like a wining proposition to me.

kasey_junk 11y ago
I completely understand settlement and grasp how the blockchain can be used to make the paper work more efficient and transparent. What I don't understand is how it reduced the counter party risk to the trade? The counter party risk isn't mitigated until cash has traded hands. This is the expensive part of being the CSD (and the reason big firms want to self clear). How does an open ledger help this problem without someone to guarantee the step between block chain acceptance and "cash in my hand with which I can use at the club".
- brighton36 11y ago
  Most (all?) open ledgers are marketing scams. The blockchain reduces counterparty risk because it escrows value, is immutable, etc. Private blockchains do none of this and are typically attempts by huckster Bitcoiners to sell software to decision makers at large companies who want to buy into a buzzword.
bradleyjg 11y ago
Let me see if I understand this: Suppose you had a single broker that held all of its customers' shares in-house (i.e. street name) and that broker represented all the owners of one particular stock. Then it could do low price, high speed settlement because it always knows where all the shares are and moving them around just requires changing a line in a database. The idea with blockchain settlement is to simulate this in a distributed fashion by having a public auditable record of where all the shares of a security are at any moment in time. --- I don't see that either scenario would solve all delivery problems, for example it would do nothing to prevent claw backs if a legal regime demanded it, but I could see how it could speed things up and prevent some game playing.

by dbs 11y ago

kasey_junk 11y ago

I completely understand settlement and grasp how the blockchain can be used to make the paper work more efficient and transparent. What I don't understand is how it reduced the counter party risk to the trade? The counter party risk isn't mitigated until cash has traded hands. This is the expensive part of being the CSD (and the reason big firms want to self clear). How does an open ledger help this problem without someone to guarantee the step between block chain acceptance and "cash in my hand with which I can use at the club".

brighton36 11y ago
Most (all?) open ledgers are marketing scams. The blockchain reduces counterparty risk because it escrows value, is immutable, etc. Private blockchains do none of this and are typically attempts by huckster Bitcoiners to sell software to decision makers at large companies who want to buy into a buzzword.

bradleyjg 11y ago

Let me see if I understand this: Suppose you had a single broker that held all of its customers' shares in-house (i.e. street name) and that broker represented all the owners of one particular stock. Then it could do low price, high speed settlement because it always knows where all the shares are and moving them around just requires changing a line in a database. The idea with blockchain settlement is to simulate this in a distributed fashion by having a public auditable record of where all the shares of a security are at any moment in time. --- I don't see that either scenario would solve all delivery problems, for example it would do nothing to prevent claw backs if a legal regime demanded it, but I could see how it could speed things up and prevent some game playing.