THE FUTURE IS DIGITAL.
Martin Halblaub, CEO of the soon to be launched SIX Digital Exchange (SDX), speaks to Best Execution about the Swiss stock exchange’s new venture to provide end-to-end trading, settlement and custody services for digital assets.
What is SDX?
To put it simply, we are launching what will be the financial infrastructure of the future. SDX’s aim is to be the world’s leading exchange for trading digital assets with tokens on the blockchain, where professional investors will be able to access, transfer and store digital assets. We will be providing a fully integrated offering in a model where asset ownership is distributed and one which allows us to leverage technology to unlock value that has not been accessible in legacy market models.
What does SDX offer?
While the relationship between SDX – as the market infrastructure – its members and end investors remains unchanged, the new technology underpinning the infrastructure brings about significant and valuable changes. The most fundamental of these is that trading and settlement will no longer be separated. Instead, they will operate in the same cycle, which we have coined ‘Riskless Trading’.
What we are able to do, is to effectively guarantee that every matched order (or execution) is settled, which is made possible through ‘atomic settlement’ on the SDX system. We’ve called it ‘atomic’ because both the delivery and payment legs of a transaction happen simultaneously, in sub-second timeframes. This makes it a single event on a ledger, where trade execution now equals settlement finality.
Riskless Trading effectively means that there is no need to mitigate risk. Sub-second timeframes means that the capital exposure of days (as in the case of T+2, for example), no longer exists and there is no need for clearing as a function.
SDX’s member banks will be able to settle their trades and other obligations against tokenised CHF within SDX. To facilitate this, SDX would accept CHF payments from member banks in central bank money and issue equivalent tokenised CHF in SDX. The value of tokenised CHF would be pegged 1:1 with CHF at all times.
Are there advantages beyond execution and settlement?
Yes indeed. Take for example asset servicing and custody. Trading today rarely includes details of the beneficial owner and thus after an on-exchange market trade there follow the allocation and reconciliation tasks. The SDX ecosystem design will provide for secure storage of client data, and therefore beneficial owner information can be included on orders and can also be used for asset servicing automation. Of course, the beneficial owner data must be secure data to the relevant member, however, the link between asset and owner in a digital world allows for real-time information at the client holding level. This will also significantly simplify corporate event handling.
How will you support the growth of securitised token and digital asset trading?
SDX is the first exchange that will cover the entire value chain, end-to-end, in a fully regulated environment, and as such we will be setting the basis for the adoption of digital asset trading in the future.
How will the exchange facilitate liquidity on the platform?
It is a core function of any exchange to provide liquidity, and such liquidity will be enabled by associated market makers and liquidity providers. We are actively targeting sell- and buyside market participants as well as market makers to encourage liquidity and price discovery.
What DLT/blockchain model does SDX use and what is the architecture?
SDX has integrated a matching engine at matching point into an opensource Corda layer enhanced by an SDX policy layer. Furthermore SDX is developing proprietary custody and key management solutions to achieve an end-to-end and fully integrated digital asset trading, settlement and custody service.
SDX will operate a network of member nodes that will facilitate the exchange of value between members. Each node will offer a set of services that corresponds to the specific role of the member. Only registered SDX members are allowed to carry out transactions in the SDX network. The integrity and consistency of the network is guaranteed through notary nodes managed by SDX with all the necessary regulatory oversight. The notary is responsible to ensure consistency of transactions and prohibit double spending.
Beyond the core DLT infrastructure, we are also reviewing all aspects of operating a market using a distributed model. This applies to data management and messaging strategies as well as deployment, operations and security controls.
Will SDX support both primary listing and secondary trading?
SDX will provide access to both primary and secondary markets, while the portfolio of products that will be available on SDX is continuously being developed in user groups together with future members of the ecosystem.
What is the product set?
SDX will, stepwise, offer newly issued equity, structured products and debt, followed by funds in token format.
We are setting new standards at the primary market level with Initial Digital Offerings (IDO) in order to clearly differentiate ourselves from the unregulated market of Initial Coin Offerings (ICO) while setting higher quality standards to what today are Security Token Offerings (STO).
SDX will therefore enable regulated institutions to trade quality tokens, which as yet do not exist, in the market in a safe environment.
SDX will develop regulated markets for products which currently are not tradeable at exchanges, such as real estate or art, allowing the efficient transfer and store of value and even enabling fractional ownership.
It will also be possible to tokenise existing securities and to efficiently transfer them on SDX.
What does the future hold?
DLT/blockchain has now reached a level of maturity and performance that enables it to be used for production-ready, enterprise-critical services and this presents a major opportunity for SIX and specifically SDX. As first movers in applying this to financial markets, SDX can help set solid standards for the future of the entire industry.
©Best Execution 2019
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