Experts from across the industry gathered together in London for the first time in person since 2019 for SIX’s flagship Post Trade Forum.
So what were the main talking points from the event?
Digital Assets – Understanding the Opportunity
Digital assets have faced a torrid time recently. For starters, the market capitalisation of crypto-currencies has fallen from a high of $3 trillion in 2021 to $850 billion last month  – while the implosion at FTX sent shockwaves throughout the industry. However, there are reasons to be optimistic about the future of digital assets.
In the case of crypto-currencies – widely considered to be one of the most volatile digital assets – regulators are looking at ways to supervise the market, something which could help the industry institutionalise itself.
Alexandre Kech, Business Head Digital Securities at SDX, SIX, said global regulators need to adopt a more harmonised approach towards supervising crypto-assets or their service providers. This, he said, will prevent crypto asset service providers from moving their operations to light-touch offshore jurisdictions – as is what happened with FTX. Sensible, joined up regulations, he continued, will be critical if investors are to be protected.
Beyond crypto-currencies, there is client interest in regulated security tokens, whereby assets are digitalised and converted into tradeable tokens. As these tokens – whose value is correlated to real world assets - can be securitised and fractionalised, it means more investors are able to gain exposure to asset classes, which previously would have been unaffordable to them.
Tokenisation can also be applied to illiquid assets – such as infrastructure, property or art – whose price movements are broadly uncorrelated to equity markets and which also provide an effective hedge against inflation, thereby facilitating greater portfolio diversification. If successful, tokenisation will help drive liquidity into illiquid asset classes.
One expert – speaking under Chatham House rules – said that transacting in tokens would not be that different from trading traditional securities, insofar as there would still be a role for established market infrastructures - such as stock exchanges, MTFs (multilateral trading facilities), CCPs (central counterparty clearing houses) and global custodians.
Post-trade Looks to Find Its Footing in the Digital Asset Ecosystem
Javier Hernani, Head of Securities Services at SIX, said there are extensive opportunities available for post-trade providers in digital asset markets. So how can post-trade providers capitalise on investors’ growing appetite for digital assets?
It was also said that custodians will be instrumental in safeguarding digital assets, although this will require market participants to make some structural adjustments to their current business models. Moreover, the collapse at FTX is likely to prompt institutional investors to work with digital asset custodians owned and operated by banks or FMIs, which are subject to stringent regulation and balance sheet capital requirements. However, one securities services executive explained that while custodians were interested in supporting digital assets, progress had been slow.
Although CCPs are open to the idea of clearing new asset classes, caution needs to be exercised when it comes to digital assets. “One of the things we try and do is to understand new asset classes and potentially give investors access to new asset classes through a classical, regulated financial infrastructure,” said Laura Bayley, Head of Clearing Services at SIX. Given their systemic importance Bayley stressed that CCPs needed to take a thoughtful and careful approach towards clearing digital assets or accepting digital assets as collateral. However, Bayley conceded CCPs would probably not accept digital assets as collateral for the foreseeable future.
Custody Goes to the Next Level
With the US, Canada and India pushing ahead with their adoption of a T+1 settlement system, experts at SIX’s Post Trade Forum looked at the implications this transition could have on the wider market.
The case for embracing T+1 – namely reduced settlement risk, margin savings and liquidity optimisation – have been made extensively. Similarly, the purported challenges associated with settlement compression – including heightened FX risk, the possibility for an increase in trade settlement fails, and the operational challenges involved with matching and reconciling trades within such a tight time period - have been articulated at length too. Despite this, one expert at the Forum said that similar warnings had been made ahead of the industry’s adoption of T+2, only for these fears never to be realised. He added T+1’s implementation would likely be as seamless as T+2’s adoption.
Nonetheless, there are legitimate concerns about adopting T+1 in the EU. Marcus Harreus, Head Commercials at SIX, said imposing T+1 in a homogenous market - such as the US - where there are only a handful of FMIs, is far more straightforward than implementing it in the EU, which has multiple FMIs and different regulatory regimes.
Moreover, Harreus added that the EU had only just introduced the Settlement Discipline Regime under the Central Securities Depositories Regulation, noting this was the primary focus for regulators, and not T+1. Despite these trepidations, there is already talk in some circles about adopting T+0 and even atomic settlement, the latter of which is already being trialled at SDX, a point made by Kech.
Ancillary Services Could Be Make or Break for Post-trade Providers
At a time when competition for wallet share is intensifying, post-trade providers need to demonstrate that they have a wide gamut of services beyond their core products such as custody. Stephan Hänseler, Head International Custody Operations, SIX, said that ancillary business lines can help providers attract new mandates, especially from clients who are looking to consolidate counterparty relationships.
Such ancillary services, added Hänseler included things like SIX’s Advanced Tax Service (ATS), an end to end tax reclaim service. Similarly, SIX’s recent acquisition of Clearstream’s 50% stake in trade repository Regis-TR will also help it provide a more streamlined set of services to its clients. An ability to diversify beyond traditional – and arguably commoditised - product suites such as custody will be vital if post-trade providers are to thrive. “We consider trade repository to be an ancillary service to SIX’s operations and post-trade activities,” said Thomas Steimann, Head Regis-TR, SIX .
An Industry on the Edge of Dramatic Change
Adoption of digital assets – together with settlement compression – are just some of the changes sweeping through post-trade, and they are transformations which the industry urgently needs to prepare for. Additionally, if providers are to widen their client reach, they will need to think about delivering services to customers which are ancillary to their traditional offerings.
 Cointelegraph – November 11, 2022 – Total crypto market drops to $850B as data suggests further downslide