Clearing and Settlement - Solved by the Blockchain
1. Blockchain - Application to
Clearing and Settlement
Colin Kwan
COO of Magnr
Investment Bank of the Future
Formerly from UBS and Deutsche Bank
2. What is Clearing and Settlement?
• Executing an order, “the trade,” declares the intention to buy or sell
a security
• “Clearing and settlement” refers to everything that happens after
that initial declaration to cause the actual transfer of assets and
ownership
• Instructions and trade-related information must flow between
broker/dealers, the securities exchange, central clearing parties,
custodial banks, and security depositories, so that each takes the
necessary action at the right time
• How well the process works depends upon how well
information flows between all of the players
Source: Harvard Research Group
5. Securities Clearing and Settlement
Exchange
Clearing Service
Clearing
Participant
(Brokers)
Clearing
Participant
(Brokers)
1. Trade ( T ) 2. Reporting
2. Notified Trade (T) 2. Notified Trade ( T )
3. Net Batch
Instructions (T+1)
3. Net Batch
Instructions (T+1)
Settlement
Participant
(Custodians)
4. Batch Instructions
(non-novated)
6. Confirmation of
DvP Transfer (T+3)
Settlement
Participant
(Custodians)
6. Confirmation of
DvP Transfer (T+3)
4. Batch Instructions
(non-novated)
Clearing House
Novates the trades and acts
as central counterparty
Settlement House
Settles novated and non-
novated trades and conducts
multilateral netting
Central Bank
Registry
7. End of Day Reporting
(T+3)
5. Instructions to effect
transfer of funds (T+3)
Source: ASX
6. Fundamentals
• In order to sell a security/product you need to prove
that you have it
• In order to buy the security/product you need to
prove you have the funds
• When it is bought/sold, the ownership is transferred
• How well the process works depends upon how
well information flows between all of the players
7. Smart Contracts
The Contract needs to have:
• What the asset is
• How much/size/weight
• Value (currency)
• Ownership
• Terms and conditions
• Actions
8. How Smart Contracts Work
Exchange
A B
Registry
Digitise the Land Deed
Buy House
Sell House Buy House
Get Token
Digitise Currency
Match Buyer with Seller
Contract receives assets
Contract distributes assets
Clearing and
settlement is
automated
Ownership is
undisputed
9. The Future is Here
• t0.com by Overstock
• Clearing and Settlement reduced to 10mins
• (the time it takes for a single confirmation on
the blockchain)
• Auto Clearing and Settlement is here to stay
10. Why Use Bitcoin
• The clearing and settlement process will be far simpler as
transfers of ownership are established immediately using
• If using fiat, ownership could be guaranteed by Central
Banks issuing “smart contracts” or digitised tokens (i.e.
Bitcoin) thus making the creation of the more complex
smart contracts is more efficient
• Using Bitcoin enables cross border transactions
instantaneously allowing trades on all markets regardless
of geography and currency
Hence why there are custodians which are trusted parties that the Clearing Houses can “trust”
Settlement parties where the Clearing house trust
Institutions which are “regulated” are trusted parties
Bitcoin/Blockchain got around all that. Transactions are performed through a trustless network
Imagine all the information was in one contract.
Party A - Buys asset from Registry and receives a smart contract
Party A - They Sign up with an Exchange, establishes anonymous connection to Party B
Party A - Makes trade with Party B, signs over contract
Party B - Sends over funds
The Smart Contract ensures that both parties transfer the assets
Party B - Once both assets are received by the Smart Contract, Smart Contract actions the distribution of received assets
