[ 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