Advancing Innovation

DTCC’s DLT Prototype Advances Industry’s CBDC Initiatives

By Rob Palatnick, Managing Director and Global Head of Technology Research and Innovation at DTCC | Dec 18, 2020

DTCC’s DLT Prototype Advances Industry’s CBDC Initiatives
Rob Palatnick, Managing Director and Global Head of Technology Research and Innovation at DTCC

Rob Palatnick, Managing Director and Global Head of Technology Research and Innovation at DTCC, was one of the featured speakers at Accenture’s Digital Dollar II event and here summarizes his remarks, which focused on opportunities DTCC is pursuing to develop digital platforms for some of its key services.

While some responses to COVID-19 related activity have accelerated efforts worldwide to test use cases for digital currencies and enhanced payment systems, DTCC has been pursuing applications of emerging technology, including DLT, for some time. DTCC is not a payment service, but we see how an enhanced digital payment infrastructure could provide tremendous efficiencies across our entire range of post-trade functions. For example, we’re moving our Trade Information Warehouse (TIW) for credit default derivatives, which processes a variety of trade lifecycle cashflows, to a digital platform, and a digital payment infrastructure could allow TIW to further optimize payment netting and settlement functions.

On the equity processing side, we are currently building an application we call Project ION. ION will be a fully functional prototype on a digital platform that provides an optional accelerated settlement service. If a decision is made to move the prototype into future production, it is envisioned to operate in parallel with our existing equities clearing and settlement system. The prototype will provide DTCC and our industry clients with the ability to experiment with new models of post trade processing and settlement, initially for equities. At DTCC, where each of our services across financial asset classes has its own settlement workflow and margin models, it seems obvious that adopting a more efficient payment rail can allow our clients to better manage their liquidity needs.

CBDC’s Promise and Risks

As part of the ION prototype, we plan to create a cash token for trade settlement that could integrate into a Central Bank Digital Currency (CBDC) token.

Going forward we can expect assets to be digitized in several other areas to expedite movement of those assets across trading venues or posting of them as collateral, and the existence of a wholesale CBDC is expected to be able to further streamline these processes.

We should be aware, however, that the initial introduction of wholesale CBDC will likely generate a set of additional risks by creating a bifurcation in the market where some cash is available in CBDC and some is available in traditional form. To mitigate these risks, which will probably prove temporary, the wholesale market will need to create the ability to move cash seamlessly back and forth.

Operational and Infrastructure Needs

At DTCC our paramount concern is market resilience, safety and soundness – in operations and execution. Our resilient infrastructure, built through decades of incremental advancements in industry practices and regulatory rules, maintains the integrity of the market. Everyone has the same playbook that tells them what to do at 2 a.m. if there is a problem.

If we assume that a wholesale CBDC needs to be built on a DLT platform, the challenge to the industry will be replacing an infrastructure that is deeply integrated into operations dashboards, schedules, monitors and alerts with a new technology that is still maturing and improving. In addition, a live wholesale CBDC and real use at market scale requires that the underpinning technology be pre-tested to its breaking point and then pushed further. And that is just the starting point.

Our Real-Time Lab

We are building the ION prototype to support a variety of accelerated settlement models, including real-time atomic DVP. Because it’s a prototype, ION gives DTCC and our clients leeway to conduct trials and discover challenges and opportunities along the way. While we and our clients see the promise of same-day settlement, many of the industry practices now in place will make it difficult to implement in the near term.

Today DTCC nets almost 200 million daily transactions down to approximately 1 million settlements. But to facilitate real time gross settlement of every trade DVP would require payment for an additional 199 million settlements -- which means an enormous amount of pre-funding capital would always have to be available for settlement. The unintended consequences of this arrangement are massive operational headaches and the loss of netting’s tremendous efficiencies.

A key feature of the ION prototype is the ability to perform netting for both securities and cash multiple times throughout the day. It’s another example of how Project ION is allowing the industry to try out a wide range of settlement alternatives and uncover the challenges they pose. We expect to learn a lot from this real-time laboratory and its real-world client experiments.

 

 

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