CSDs Sign Letter of Intent to Collaborate on Initiatives using Distributed Ledger Technology

The Central Securities Depositories (CSDs) Strate, South Africa and NSD, Russia have signed a Letter of Intent at the Sibos event in Geneva in September 2016.

 

The intention is to forge a partnership between the two CSDs to develop solutions utilizing Distributed Ledger Technology (DLT) with the first use case focused on proxy voting. The parties believe that through industry-wide collaboration, CSDs will be better positioned to face the changes presented by DLT technology and develop innovative solutions for the benefit of the financial market.

 

DLT, which has emerged as a relatively new and rapidly growing innovative technology, is set to revolutionise the financial markets and fundamentally create a paradigm shift. Given that there is the potential for financial markets to create a distributed ledger that settles securities transactions, financial market infrastructures need to embrace the technology and identify opportunities that will add value to their current clients.

 

This relationship allows both parties to explore opportunities for mutual cooperation in the post-trade settlement arena including:

 

* Information sharing regarding standards, regulations and DLT technologies.

* The exploration of solutions that are of mutual benefit to both CSDs; as well as

* Potential cost savings through the sharing of technology and development costs.

 

A number of other CSDs have expressed interest in joining the partnership and Strate / NSD have welcomed these discussions.

 

Monica Singer, CEO of Strate, says “It is an important time for CSDs to be working together to define the future landscape in the DLT environment. Strate looks forward to developing this long-standing and valuable relationship with NSD to develop solutions for emerging market CSDs”.

 

Eddie Astanin, chairman of the executive board, NSD comments “We believe that the securities settlement and custody industry is one of the promising sectors where we can use new technologies. I think that post-trading may become the starting point of transition of the distributed ledger technology and blockchain from theory to practice. In 2015, we began research and initiated new developments; since that time we have developed valuable expertise in this sphere, and now we are eager to share it with our colleagues. “

 

In April 2016, National Settlement Depository was one of the first financial organizations in the world that announced the development of a blockchain-based prototype of e-proxy voting.

 

Mr. Astanin added that “fast development of technologies and the huge number of startups that enter the market every month is a challenge of our time for major companies. We have to be one step ahead of everyone else and to use the opportunities we have now. Only the united efforts of the largest players in our industry will enable them to respond to new challenges and integrate new technologies.”

Putting the ‘Chief’ in Financial Officer

While the primary role of a Chief Financial Officer (CFO) is to make sure financial records of the company are in order, the role has evolved from the back-office functions of two decades ago. The rules of the game have changed for CFOs. Strate looks at the evolving role of the Chief Financial Officer and welcomes its new CFO, Ashnee Maharaj, on board.

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Revolutionising South Africa’s Bond Settlement Model

With an average of R2.4 trillion bonds under Strate’s custody, Strate’s bond market clients will soon enjoy using one of the best and most-used CSD technologies globally, the TCS BaNCS Market Infrastructure (MI). It will enable the move from older technology ISO15022 standards to ISO20022 standards. Issuers will also be provided with an interface that can enable them to do their top-ups, redemptions, make calls or check balances directly with the CSD.  The streamlined corporate actions processes are expected to offer better, faster entitlement communication and payment distribution.

 

Strate is well on its way in introducing the revolutionary bond settlement system that uses a Securities Ownership Register (SOR) and provides numerous benefits to the market – such as ready support for segregated depository accounts and multiple settlement runs.

 

The technology also has the functionality for corporates to apply to become a direct CSD Participant at Strate. The technology allows a move away from omnibus account structures and break those down into individual or institutional accounts, an internationally-recognised best practice known as the SOR. The SOR is already utilised in Strate’s technology that settles money market securities. The introduction of an SOR provides issuers with real-time access to their note holders and improves transparency for the market.

 

Institutional clients, individuals and issuers that have their own accounts at the CSD will continue to have these operated by their CSD Participant. The technology will also enable member settled accounts, which provides the details of institutions or individuals sitting under stock brokers’ accounts. Strate’s solution allows the stock exchange to supply it with the information on a daily basis, uploaded directly into its system.

 

While South Africa is used to bonds settling on a T+3 settlement cycle in the Strate environment, the new system can cater for any settlement cycle from T+0 upwards. Its functionality also allows for back-to-back links across different markets; so if an asset is bought on exchange and is sold on the over-the-counter market, this functionality allows for greater efficiencies across all these markets.

 

TCS BaNCS MI for bonds will continue to use central bank funds to facilitate the payment leg of the transaction, ensuring risk mitigation remains a priority through simultaneous, final and irrevocable delivery versus payment (SFIDvP). In terms of this,  securities can never move without the cash being paid, or vice versa, irrespective of the settlement cycle. Furthermore, it provides multiple settlement runs to minimise failure.

 

The bonds  implementation is scheduled for mid-2017 forms part of a wider programme where Strate will replace its IT infrastructure for all asset classes. The implementation of money markets took place in February 2016, while the equities market will be switched over at later stages using a phased approach.

 

The new infrastructure offers the market a streamlined service, as multiple systems are consolidated into one. Strate is now in a position to offer more innovative products to the market in a much shorter time, using the new system.

 

 

Settlement History Being Made with T+3

On Monday 11 July 2016, history was made. The JSE’s equities market, which used to run on a five business day settlement cycle for the past few decades, moved to a new three business day settlement cycle (T+3). This formed part of a project spearheaded by the JSE.

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[Video] GIBS Forum: The Potential of Blockchain

Tanya Knowles, Strate’s former Head of Business and Innovation and now the Executive Director of Fractal Solutions, a Division of Strate, spoke at a Gordon Institute of Business Science (GIBS) Forum to introduce the concept of blockchain and unpack some of the latest developments around this disruptive technology.

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Blockchain Technology – A Matter of Survive or Thrive

There is a frenetic and rather exciting energy amongst many financial services institutions.  Boardroom debates and conference agendas are quickly morphing from staid conversations on risk management and regulation to fintech, the internet of things and most noteworthy the potential disruption by blockchain technology. As with all new and exciting innovations, there is somewhat of a dichotomy between the technology visionaries and the Luddites of the industry. However, one thing is certain, those operating in the financial markets cannot maintain their current status quo and need to embrace new thinking which is in line with the exciting changes that lie ahead.

 

No article on blockchain seems complete without describing it as the distributed ledger technology that underpins Bitcoin. Yet industry debates in recent months have matured far beyond this definition to focus on the additional applications of this technology.

 

At a high level, a blockchain is a single distributed ledger that anyone can view, with the option of no single participant or authority in control. It is collectively kept up-to-date and transactions are immutably recorded and cryptographically stored.  The technology has the potential to provide credibility and trust to the ecosystem with built-in smart logic and high levels of automation.

 

The problem today is that many organisations seem to be trapped in the hype of analysing the intricacies of the technology, conducting due diligences on thousands of fintech start-ups and generally focusing on how to protect their legacy business. While some of these are necessary evils, there is a lot to be said for taking a step back to look at the principles (See diagram 1) behind blockchain technology and how those can be applied to optimise, innovate, challenge and grow one’s business for the benefits of the customer.

 

Principles of Blockchain
Principles of Blockchain

 

The question that comes to mind is how the financial services industry can apply the principles of blockchain technology to an industry that has become increasingly complex and overly cumbersome. This is not the time to just be substituting existing operating models and systems with blockchain technology but rather realising that there is a completely new paradigm of thinking – one which fundamentally alters the way in which our industry and society hangs together in an entirely new, different and better way.

 

As a short-term reprieve, the reality is that regulators are not going to allow blockchain technology and fintech start-up to ‘take-over’ the financial markets overnight. This is the most highly regulated industry – the fabric upon which the world’s economy operates. However, they are also not going to sit back and protect legacy businesses when there is real value and benefits to be found. A number of regulators are already showing a strong interest in blockchain technology and the industry is moving at an unprecedented rate that one cannot depend on regulatory protection indefinitely.

 

It is through truly understanding and applying the principles of what blockchain offers that the industry can begin to have a completely different and rewarding conversation around the future of financial services. Without this, regulation will catch up and fintechs will continue to legitimately offer new and better services to customers – profoundly shifting the balance of power away from established business. Innovative thinking around blockchain’s principles needs to be harnessed for an organisation to thrive and not just survive.

Author: Tanya Knowles, Executive Director of Fractal Solutions, a Division of Strate (South Africa’s Central Securities Depository).

Women’s Month Spotlight: Education

Women represent approximately half of the global population, half of South Africa’s population, and half of the population of working age (15-64 years) in the country. That’s 18.5 million women that can add value in South Africa, yet the country still lags behind in unequal access to education. Read Monica Singer and Dr Merrill van Der Walt’s views on the importance of education.

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