Emerging Blockchain to Enhance Securities Settlement Systems in Hong Kong

LONDON – 28 March 2017 – GreySpark Partners, a leading global capital markets consultancy, has published a new report — Enhancing Securities Settlement Systems: The Application of Distributed Ledger Technology in Hong Kong — exploring a solution that could be introduced to modernise the current securities and settlement processes and make them more effective. The solution presented in the report involves eliminating a number of intermediators, including the clearinghouse, which would lead to real-time, automated processes for faster trade settlements.

In February 2017, it was announced that the Hong Kong Securities and Futures Commission is working with the R3, a consortium of over 80 global financial institutions and regulators, to enhance financial markets and introduce a blockchain solution. This announcement demonstrated interest in potential large scale changes to the infrastructure of clearing and settlement in Hong Kong. It will be of concern to industry participants in terms of the changes that will be needed and how any potential solution would impact their businesses. The new GreySpark report details an outline of a potential solution to securities settlement and it explores how this solution could help banks reduce the cost and risks associated with settlement.

Blockchain, a method of immutably storing transaction records, utilises distributed ledger technology to quickly and securely facilitate transactions without the need for intermediaries – in the case of its use in securities settlement, without the need for a clearinghouse. To facilitate the process, there are certain operational obligations that present an immediate challenge to the industry including the operational model of the network, the design and management of smart contracts, the management of a database of settlement information, the ownership and maintenance of the settlement server. These and other operational considerations are discussed in the report.

Rachel Lindstrom, GreySpark senior consultant and report co-author, said: “To implement a blockchain-based solution to securities settlement in Hong Kong would clearly provide many benefits. While overturning the central clearing mandate is no mean feat of itself, there is a raft of other very challenging issues that would need to be resolved, not least a host of legal and regulatory issues and the implications for the market of changing trading strategies.”

Yousuf Hussain, GreySpark Senior Consultant and report co-author, said: “The proposed block-chain based settlement solution not only reduces the settlement time by eliminating the intermediaries, but it also mitigates operational risk by decreasing the number of single point of failures within the process flow.”

For further information on GreySpark’s research, please visit: http://research.greyspark.com or e-mail: press@greyspark.com