The Depository Trust & Clearing Corporation (DTCC) has submitted comments to the European Securities & Market Association (ESMA) in response to the discussion paper “The Distributed Ledger Technology Applied to Securities Markets,” issued by ESMA in June.
The discussion paper analyzes the potential impact of the application of distributed ledger technology (DLT) on the securities market, including the post-trade infrastructure for these markets. ESMA plans to use the feedback from the discussion paper to develop a position on the use of the DLT in securities markets and, in particular, to assess whether a regulatory response may be needed.
According to the paper, ESMA began analyzing virtual currencies in 2013. In April 2015, ESMA published a call for evidence on investments using virtual currencies or DLT. The results of the call for evidence showed that while investments using virtual currencies as underlying assets remained marginal, the underlying technology had the potential to be used by financial markets outside the space of virtual currencies with possible disruptive effects. Thus ESMA decided to analyze the possible impact of the application of DLT to securities markets. In particular, ESMA looked at the potential benefits and risks that DLT could bring when applied to securities markets, from a public policy perspective.
In its comment letter, DTCC noted it has been examining closely, for some time, the potential benefits offered by DLT to address certain limitations of the current post-trade process by modernizing, streamlining and simplifying the siloed design of the financial-industry infrastructure.
“While the development of DLT for post-trade processing is still in its infancy, the time is right for policymakers to actively engage with the industry regarding potential opportunities,” explained Mark Wetjen, DTCC Managing Director and Head of Global Public Policy. “Regulators globally – such as ESMA – are taking a great interest in DLT and obtaining a better understanding of how the technology might fit within current regulatory frameworks. Collaboration is key - without the support of policymakers and regulators, widespread adoption of DLT will not be possible.”
Advancing the DLT Initiative
DLT has gained widespread attention due to its potential to make more efficient the processes of clearance, settlement and payments in financial transactions. The challenge, however, will be to ensure that any such efficiency gains to various types of post-trade processing through use of DLT do not otherwise frustrate key public policy goals established around the world, including the mitigation of systemic risk, preservation of market integrity and enhanced transparency.
To meet that challenge, DTCC has advocated the following:
Industry-wide collaboration will be necessary in order to take advantage of opportunities that DLT could create in improving efficiency and reducing costs in the post-trade environment. Only with such collaboration will the requisite standards and appropriate governance model be developed to harness the potential of DLT while ensuring that important public policy goals continue to be met.
Policymakers globally need to continue to prepare in advance for tomorrow’s securities markets and their post-trade infrastructures. By understanding today how tomorrow’s securities markets could look through advances in DLT or other technologies, the regulatory framework can more readily and appropriately evolve while remaining true to established and important policy goals administered by ESMA and other regulators around the world. Likewise, through this approach, regulators also will be able to realize more quickly potential benefits such as greater transparency that DLT could offer.
DTCC has conducted a number of internal experiments with DLT software, as well as pursued a proof of concept using the technology, related to credit default swaps. Additionally, DTCC is working with Digital Asset Holdings – a blockchain solutions service provider – to test a proof of concept to streamline how U.S. government securities repurchase agreements clear and settle.
“DTCC will continue to collaborate with industry stakeholders to explore opportunities to drive innovation in post-trade processing to benefit the industry and the investing community,” said Robert Palatnick, DTCC Managing Director and Chief Technology Architect. “We look forward to engaging with ESMA and joining efforts to identify the practical, operational and institutional effects DLT will have on the financial services industry.”