21. Post Trade Clearing, Settlement & Processing

TL;DR

Blockchain technology holds promise for permissioned blockchain projects in clearing and settling, providing greater efficiency, automation, and cost reduction.

Transcript

The following content is provided under a Creative Commons license. Your support will help MIT OpenCourseWare continue to offer high quality educational resources for free. To make a donation or to view additional materials from hundreds of MIT courses, visit MIT OpenCourseWare at ocw.mit.edu. GARY GENSLER: Today's a little bit of a discussion abou... Read More

Key Insights

• ✳️ Blockchain technology has the potential to revolutionize clearing and settlement in financial markets, providing greater efficiency, automation, and risk reduction.
• ✳️ Netting is a significant economic benefit of central clearing, enabling the consolidation of multiple transactions and minimizing counterparty risk.
• 😀 The adoption of blockchain technology for clearing and settling faces challenges related to simultaneous execution and settlement, prefunding requirements, and integration with existing market infrastructure.

Questions & Answers

Q: How does clearing differ from settlement?

Clearing involves validating identities, confirming securities ownership, and managing net exposures, while settlement is the final transfer of ownership on a ledger.

Q: What are the benefits of netting in clearing and settling?

Netting lowers counterparty risk, reduces transaction costs, and enhances operational efficiency by consolidating multiple transactions into fewer entries.

Q: Can blockchain technology be used for real-time settlement?

Real-time settlement would require prefunding or simultaneous execution and settlement, which could challenge the current economic models and operational practices in capital markets.

Q: How can blockchain technology improve clearing and settling in illiquid markets?

Blockchain can bring greater transparency, automation, and cost reduction to illiquid markets by digitizing assets, enhancing record keeping, and enabling peer-to-peer transactions.

Summary & Key Takeaways

• Clearing and settling services are essential in financial markets to authenticate identities, validate securities ownership, and manage net exposures.

• Blockchain technology offers the potential to improve these processes by providing immutable records, multiple party consensus, and lower verification and networking costs.

• The Australian Stock Exchange is actively exploring blockchain technology for clearing and settlement, aiming to reduce operational costs and introduce smart contract automation.