Remarks on Blockchain and Distributed Ledger Technology in Financial Market Infrastructures

Abstract

Distributed Ledger Technology (built on a blockchain) enables peer to peer interactions between financial institutions without the need for any distinguished, trusted intermediaries. In principle, this opens the possibility of removing the “too big to fail” risk of CCPs and of significantly speeding up settlement times to just a few minutes, if not seconds. This could result in material reductions in capital/margins to protect against counterparty risk, and material reductions in back-office reconciliation costs. This attractive vision is by now well-known and is recalled in section 1. The objective of section 2 is to identify any limitations the PFMI standards might impose on the use of DLT (blockchain) in a Financial Market Infrastructure. Section 3 takes a business perspective and looks at the challenges of shortening settlement windows to T+1 and beyond. The last section discusses how settlements might potentially evolve in the equity markets in the future to address the apparent loss of the multilateral netting benefit in very short (near instantaneous) settlement times.