Global financial messaging services firm SWIFT and seven central securities depositories (CSDs), including SA's Strate, have signed a memorandum of understanding (MOU) to work together to demonstrate how distributed ledger technology (DLT) could be implemented in post-trade scenarios, such as corporate actions processing, including voting and proxy-voting.
The group will investigate the types of new products that can be built using DLT, and how existing standards such as ISO 20022 can support it.
One form of distributed ledger design is the blockchain system, which can be either public or private.
Blockchain network
In October last year, SA's largest banks, along with Strate, signed a letter of intent to partner on the use of blockchain technology last year.
In November, Nasdaq and Strate announced an agreement for Nasdaq to deliver a new blockchain solution that would bring electronic voting to the South African capital markets.
Strate, Abu Dhabi Securities Exchange, Caja de Valores, Dep'osito Central de Valores, Nasdaq Market Technology AB, National Settlement Depository and SIX Securities Services are among the CSDs participating in the DLT project with SWIFT.
As SA's CSD, Strate provides electronic settlement of equities and bonds transactions concluded on the Johannesburg Stock Exchange. It also settles transactions in money market securities and recently introduced a collateral management service.
According to SWIFT, additional CSDs are expected to join in the coming weeks.
The firm says today, securities processing, particularly in areas requiring multi-party contact, involve extremely cumbersome manual processes that can carry significant inherent cost and risk.
As a part of the MOU, SWIFT and the CSDs have defined the product requirements for an e-voting solution based on DLT that includes common standards (ISO 20022) and principles.
"To ensure interoperability and smooth migration, it is crucial that new technologies support existing common standards such as ISO 20022," says Stephen Lindsay, head of standards at SWIFT.
"The promise of the technology on paper is great, but it is currently missing a key component around standardisation. There is clear value in re-using established business definitions and facilitating interoperability among DLT implementations, which this project will demonstrate."
"Blockchain technology is playing a transformative role in the financial services industry globally, and Africa is also at the forefront of this innovation. SWIFT is excited to collaborate with key industry players to investigate the use of new technologies and help find a common standard for DLT in post-trade," says Louise Mostert, SA country manager at SWIFT.
DLT research
Other aspects of the MOU include fostering collaboration among the CSD community in DLT research and development, helping define the role of financial market infrastructure providers in markets based on distributed ledgers, and identifying, defining and developing additional use cases for DLT in a CSD environment and the post-trade landscape, such as services for different kinds of DLT-based digital assets.
In addition, SWIFT will focus on creating and adapting common standards and principles for the use of DLT among CSDs and the financial industry, and promoting the adoption of those standards and principles to other parties, including regulators.
Confirming the importance of the CSD Working Group on DLT, the International Securities Services Association (ISSA) recently endorsed the group and included it as part of a new work stream within the association's existing Working Group on DLT, giving this initiative greater industry visibility.
As part of ISSA, the CSD Working Group on DLT will initially focus on digital assets with a goal to establish a business framework for how these assets could be used in the post-trade space. The framework will identify key definitions, classifications, services and post-trade service provider roles. Findings from the use case on digital assets are expected to be published in Q2.
"There is a lot of potential for DLT in securities processing and the work being led by the CSDs working group on DLT is tackling a key challenge related to emerging technologies, which is a clear lack of standards," says Thomas Zeeb, CEO of SIX Securities Services and chairman of ISSA.
"As the industry evolves, DLT-specific standards such as ISO 20022 will provide a great foundation, in terms of both existing business content and approach."
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