Settlement cycles have shortened from the 14 days that it took when horses and ships were part of the process to the current norm for many financial transactions of 3 days abbreviated as T+3. The push continues to drive that further down to T+2 and T+1. Straight-Trough-Processing (STP), aims at eliminating multiple re-keying and reduce the time from initiation to delivery. In this post Distributed Ledger Platforms (DLP) are proposed as an alternative to reach STP objectives.
Shortening processing cycles can bring in reduced settlement risk, as concluded on a previous post reduced human interaction on the other diminishes operational risk while automation along with streamline of workflows contribute to operational costs savings. Finally, Capital optimization can also be gained as funds can be freed up or received quicker
While STP solutions approach the problem by optimizing different segment on the transaction life-cycle. DLP based solution can take a different approach by relying on two key properties:
- ledger replication and 2) instruction encoding in smart-contracts. These two are well explained by Richard Brown here and here
ledger replication changes in each phase are simultaneously available to all points in the STP continuum, while smart-contracts can encode logic on how to act on those changes. For example, events affecting a derivatives contract can be detected anytime along the contract life-cycle triggering the smart-contract to generate delivery instructions
DLP are not designed purposely to tackle STP objectives, the automation and speed gains are inherent side-effect of these platforms. DLP approach can yield additional benefits:
- Extendibility: While conventional STP implementation tend to be of limited scope such as corporate treasuries or interbank departments, DLP based solution could broaden the reach to more participants, e.g: brokers, custodians, clients, etc while cryptographically restricting the level of access of each entity. For example an external auditing entity could be permissioned with read-only access to risk data for real-time assessment of intraday risk.
- Enhanced financial controls: Besides reduces the unintended or malicious key re-entering of a human administrator, control units can benefit from DLPs transparent and temper resistance management of ledgers, recorded changes can be practically impossible to modify without leaving a trail, increasing the audit-ability value of the replicated ledgers.
- Lowering interoperability barriers: A successful STP implementation, requires buy-in of multiple teams and organizations. The interdependence of the segments owned by different organizations in the transaction life-cycle makes it all-or-none proposition to achieve STP objectives. The neutral aspect of LDP platforms allowing for mutual ownership without individually control coupled with the ability to add more participants at desired access level can help in reducing reservations on buy-in negotiations
While STP can bring incremental progress towards the T+2 and T+1 targets, DLPs can offer a more drastic improvement i.e seconds instead of hours, T+3 achieved in the 90s was a major achievement, however today it seems inadequate as banks continue to shift away from paper-based to electronic transactions and trade execution to delivery ratio continues to shrink. The quicker processing and flexibility that new breed of platforms bring make them worth exploring in the analysis of STP solutions.
Chandy Chandrashekhar: Cost Benefit Analysis of Shortening the Settlement Cycle Rimpi, Kaur: The Impact of Electronic Banking on Banking Transactions: A Cost-Benefit Analysis