capital markets, securities management concepts
- jim mason
- jimm1
- Jim Mason
Key Points
- public and private markets are regulated differently
- markets, securities, trading and settlement are subject to the regulations for the related jurisdictions those activities occur in
- all parties should "lean into" regulations, not away from them > work with regulators to make it easy, transparent, accurate, useful, timely
Key Items
References
Key Concepts
US Securities clearing system
https://en.wikipedia.org/wiki/Clearing_(finance)#United_States_clearing_system
Security identity types > CUSIP, SEDOL, ISIN, TICKER registry lookups
https://blogs.cranfield.ac.uk/library/company_codes/
Explainer videos
Audience?
internal? external? DLT technologists? Other technologists? non-technical users? business analysts and planners? other?
what is the right context for: community > roles > goals > challenges > opportunities > problems solved > investments > risk management > expected impacts
DLT Explainer story
What use case to focus on?
For a given use case and community roles -
what is the use case, community roles?
what are the key goals, challenges, opportunities?
what are the key economic values by role? incentives?
what are the trusts needed?
what are the key proofs needed?
what are the operations risks to manage?
what operations performance factors to optimize?
what can make the community more adaptable? more resilient? safer?
the story >>>
the context > actors > problems now > what is DLT? > problems addressed > DLT strategy > DLT impacts > next steps
Candidate explainer use cases
insurance claims ?
insurance underwriting?
securities trading?
securities settlement?
crypto trading and settlement?
NFTs?
supply chain traceability?
healthcare vaccinations? fraud?
Story flow
key points to cover
story context, roles
customers, exchanges, broker / dealers, banks, bizMgr, ITMgr
current
problems and impacts with current solutions
opportunities
new solution strategy
value delivered
Other DLT explainers
Sybal POGS explainer
Other Explainers
What is BLOCKCHAIN? The best explanation of blockchain technology
https://www.youtube.com/watch?v=3xGLc-zz9cA
Digital identity management: How much of your personal information do you control? - 3 mins - A - IBM
https://www.youtube.com/watch?v=H69l_trRArU&list=PLtA44cA85ayXxZ9IRNF5vJFIgPp7dR_Zv&index=22&t=2s
Hyperledger Fabric Explainer - 2 mins - A - IBM
https://www.youtube.com/watch?v=js3Zjxbo8TM&list=PLtA44cA85ayXxZ9IRNF5vJFIgPp7dR_Zv&index=9
Decentralized identity explained - 3 mins - A - Microsoft
https://www.youtube.com/watch?v=Ew-_F-OtDFI
What is the difference between Bitcoin and blockchain? - 3 mins - A - IBM
https://www.youtube.com/watch?v=MKwa-BqnJDg
How does a blockchain work - Simply Explained - 6 mins - B
https://www.youtube.com/watch?v=SSo_EIwHSd4
Digital ID - 3 mins - B
https://www.youtube.com/watch?v=GMvex7vsRnU
What is Blockchain? - Explained Simply by IBM Carolyn Rogers - 11 mins - C
https://www.youtube.com/watch?v=hUmhuyluIJ0
Explainer video for blockchain shipping network vs current broker solution
The only true DeFi solution I ever heard of
- My friend John came to me to borrow $50
- He and I both had wallets
- I didn't trust him so there was counter-party risk
- I gave him the $50
- Never heard from him again
Is this a true DeFi app?
- totally decentralized network
- 2 counter parties that don't trust each other
- real funds transfer from 1 entity to another
- NO INTERMEDIARIES
Securities Issuance
https://www.dtcc.com/settlement-and-asset-services/issuer-services/how-issuers-work-with-dtc
Securities Markets & Trading
- many jurisdictions, markets, marketplaces, exchanges, participants
- assets both real and tokenized
- payments in many different formats
- many networks connect to enable markets, trading, clearing, settlement, custody and more
Securities Clearing and Settlement
Models for Clearing and Settlement
DvP model - Delivery ( of securities ) vs Payment
https://en.wikipedia.org/wiki/Delivery_versus_payment
wholesale and retail markets
A Prefunded Account is a collateralised trading account where the trading limit is equivalent to the amount of funds deposited into the account. It lets you enjoy lower online brokerage rates for SGX and other markets.
Prefunded Load
Settlement methods
RTGS - real-time gross settlement
every trade is settled real-time individually
trades are pre-funded
Advantages of RTGS
Disadvantages of RTGS
funds are allocated and disbursed on trade execution
today, brokers offer cash trades where the settlement is immediate on trade execution and the cash is withdrawn from the client's account
Netting Obligations - periodic settlement
currently, the vast majority of trades are settled between market participants using DTCC settlement services on a netting basis
Advantages of Netting
Significant reduction in transaction volume between participants ( over 95% in many cases )
buyers can purchase on margin credit increasing purchase capacity
Disadvantages of Netting
payment risks from buyer
payment delays to seller
guarantees on payment by market participants normally required
SEC proposed rules on T+1 settlement
https://www.sec.gov/rules/proposed/2022/34-94196.pdf
Cross Margin arrangements
https://www.investopedia.com/terms/c/crossmargining.asp
can be between traders, exchanges or clearing corporations
for CME and DTCC , SEC has to approve
KEY TAKEAWAYS
- Cross margining is an offsetting process whereby excess margin in a trader's margin account is moved to another one of their margin accounts to satisfy maintenance margin requirements.
- The process allows a company or individual to use all of their available margin across all of their accounts.
- Cross margining increases a firm's or individual's liquidity and financing flexibility by reducing margin requirements and lowering net settlements.
- The unnecessary liquidation of positions and therefore potential losses is also avoided through cross margining.
- Cross margining services are calculated through clearing houses and clearing members, including prime brokerages that offer cross margining services to their clients.
- As a strong risk management tool, cross margining is particularly useful in volatile markets and for long-term trading strategies.
DeFi settlement example
creating escrow contracts with token assets for buyer and seller with DEX intermediaries
assumptions for escrow trades of DeFi assets
- Buyer and Seller have accounts with a decentralized exchange ( DEX )
- Buyer and Seller have software or hardware wallets and applications to access their DEX platform
- the DEX platforms can access ALL related assets for sale on ALL DEX s to get the best prices ( not true in crypto now )
- the DEX platforms are backed by custodian banks with insurance on assets from bank failure ( not true in many cases now )
- the DEX trading fees are low ( not as low as CeFi - Classic Finance platforms now )
- the DEX purchase fees for purchases of products ( eg debit cards ) are low ( similar or higher than existing bank debit cards )
- the DEX withdrawal fees for withdrawal of fiat for crypto are zero ( no they are very high today )
- the DEX provides fully compliant KYC, AML and OFAC verifications on all account holders and asset transfers ( usually not true )
- the management of accounts, funds and trades at a DEX involves no security risks or identity theft risks ( not true )
process for escrow settlement of a trade
- Given
- buyer and seller have wallet apps with funds, token assets
- and market place and settlement servicer are replaced by
- decentralized exchange market places ( a DEX ) banked by digital asset custody banks
- with a MarketMakerMatcher service in compliance with US securities laws
- TradeManager service to record trades for all parties in compliance with US securities laws
- SettlementManager services to clear and settle trades for all parties in compliance with US securities laws
- When
- the MarketMakerMatcher.tradeMatch is made
- Then
- the TradeManager.createTrade and recordTrade
- the TradeManager.notifies all parties and the SettlementManager of the trade execution
- the SettlementManager.settleTrade for the Trade
- validating the trade inputs and consents by buyer and seller
- placing the seller assets in escrow contract
- and the buyer funds in escrow contract
- and issues the seller the funds from escrow
- and issues the buyer the assets from escrow
- notifies the seller, buyer and market the trade has completed successfully
- So
- the trade can be completed for the buyer and the seller
- with no risk of loss to either party
- with all obligations fulfilled on payment and receipt of assets
- using the TradeManager smart contract processes
- in compliance with US securities laws
Lessons learned on Digital Asset Trading
- if you want secure, legally compliant trades with good execution and minimal risk of loss there is ALWAYS at least 1 intermediary
- DEFI DEX platforms in general are less secure, higher cost and less efficient than CeFi ( Classic Finance ) platforms today in general
- The concept of P2P peer-to-peer trading without any intermediaries safely, efficiently, without risk or a middle man ( as a platform ) does not exist today
- Reality is a digital platform is always an intermediary between a buyer and a seller to manage counter party risk between buyer and seller
Potential Value Opportunities
PERPETUAL FUTURE CONTRACTS IN DLT-2024-paper link
PERPETUAL FUTURE CONTRACTS IN DLT-2024-paper.pdf file
This study presents a groundbreaking Systematization of Knowledge (SoK) initiative, focusing on an in-depth exploration of the dynamics and behavior of traders on perpetual future contracts across both centralized exchanges (CEXs) and decentralized exchanges (DEXs). We summarize the features of CEXs and DEXs and propose 4 exchange models that govern the operations of exchanges in different type, allowing for the classification of any exchange into one of these predefined models Our research also includes an empirical analysis of traders behavior in exchanges of the 4 types of models. On DEX of Virtual Automated Market Making (VAMM) Model, open interest on short and long positions exert effect on price volatility in opposite direction, attributable to VAMM’s price formation mechanism. In the DEXs with Oracle Pricing Model, we observed a distinct asymmetry in trader behavior between buyers and sellers. Such asymmetry might stem from uninformed traders reacting more strongly to positive news than to negative, leading to a tendency to accumulate long positions. This study sheds light on the potential risks and advantages of using perpetual future contracts within the DeFi space while provides mathematical basis and empirical insights based on which future theoretical works can be configurated, offering crucial insights into the rapidly evolving world of blockchain-based financial instruments.
Startup Business Valuation Metrics Models - 2023
startup-business-metrics-valuation-basics-2023.pdf link
startup-business-metrics-valuation-basics-2023.pdf flle
Input requested on EU securities settlement design on token platforms
https://mail.yahoo.com/d/folders/1/messages/AIdmc8Q-xHtGYdTR_w6xuP2uD6g
ESMA DLT on tokenized securities
Difference between Private Equity PE and Venture Capital VC
"Private markets", on the other hand, deal with "venture capital" (VC) or "private equity" (PE) which is ownership in a company that is not publicly listed.
Like investing into a hot tech company like Google.
Main difference:
🧠 VC is likely an investment into EARLY stage company (think startups).
🧠 PE targets more MATURE companies that may be close to listing on a stock exchange or are large in size.
Particularly for PEs, these investments are not as easily accessed by the average investor because they are usually very large in size (tens if not hundreds of millions of US$) and not listed in public markets.
VCs/PEs may also lock your money up for multiple years.
Here's 5 stages from VC to PE investing and what they mean:
🚀 Angel (pre-VC): "Angel" investors give early stage support to startup level type companies when institutional investors are not ready to invest yet.
This involves a company which may have an 'idea' but has not properly validated it yet and built it into a business.
To raise funds these companies will ask friends or family to financial back them.
Investment size: US$10K - US$250K
🚀 Seed (VC): These companies have now at least have somewhat validated their product/service with customers or convincing research.
The money is typically used for product development and business expansion and this is when the first full time Sales & Marketing people get hired.
Investment size: US$250K - US$2M
🚀 Growth (VC/PE): At this stage companies more likely has figured out where their product/service has a need in the market but may still be unprofitable 💸
The fundraising is mainly for EXPANSION both for the team and their business...like pouring oil on a fire 🔥
Investment size: US$10M - US$50M
🚀 Crossover (PE): Investors at this stage are looking for companies that have SUSTAINABLE business models & profitability.
This funding may be used to expand into new international markets or develop multiple products/services.
Listing on a stock exchange (IPO) may not be far.
Investment size: US$50M - US$100M
🚀 Late stage/buyout (PE): Investors may be most focused on making these mature companies more efficient, marking up its value then 'flipping it' for a bigger multiple (return).
The company is very close to an EXIT either listing on a stock exchange (IPO) or getting "bought out".
Investment size: Depends but could be millions into billions.
What's your view on VCs and PEs?
-
#markets #wealth #venturecapital #privateequity
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Potential Challenges
kpmg-regulations-addressing-top-of-mind-capital-markets-wealth-management-issues.pdf link
KPMG - top-mind-issues-capital-markets-wealth-management.html
kpmg-regulations-addressing-top-of-mind-capital-markets-wealth-management-issues.pdf file
Crypto and US Security Laws
Gensler before Congress 4/2023
Jim >>
Thanks ... the battle continues between Gensler and the crypto crowd. I do agree that the crypto exchanges have potential conflicts of interest in their multiple roles that Security laws were created to minimize those risks
cspan coverage of Gensler testimony 4/2023
https://www.c-span.org/video/?527459-1/sec-chair-testifies-house-oversight-hearing
criticism >>
COMMISSION IS BROUGHT NEARLY 50 SEPARATE ENFORCEMENT ACTIONS AGAINST DIGITAL ASSET TERMS AND OUT FROM YOUR AGENCIES REQUESTING ADDITIONAL $70 MILLION TO EXCHANGER ENFORCEMENT AGENDA AT THE SAME TIME HERE REFUSED TO PROVIDE CLARITY AND WHETHER DIGITAL ASSETS OFFER PART OF AN INVESTMENT CONTRACT TO SUIT THE COMPUTER SECURITY WAS MORE IMPORTANTLY TO CONFIRM WITH THOSE LAWS.
https://www.sec.gov/news/testimony/gensler-testimony-house-financial-services-041823
The investing public generally is buying crypto tokens because those investors are anticipating a profit and hoping for a better future.
Given that most crypto tokens are securities, it follows that many crypto intermediaries are transacting in securities and have to register with the SEC
Crypto intermediaries—whether they call themselves centralized or decentralized—often provide an amalgam of services that typically are separated from each other in the rest of the securities markets: exchange functions, broker-dealer functions, custodial and clearing functions, and lending functions. The commingling of the various functions within crypto intermediaries creates inherent conflicts of interest and risks for investors—risks and conflicts the Commission does not allow in any other marketplace
ASX failure on DLT
https://www.yahoo.com/finance/news/australian-stock-exchanges-blockchain-failure-000538910.html
asx-daml-project-yahoo.com-Australian stock exchanges blockchain failure burns market trust.pdf link
asx-daml-project-yahoo.com-Australian stock exchanges blockchain failure burns market trust.pdf file
ASX-daml-project-cancelled-Chairman Apologizes After Writing Off 165 Million Blockchain Project link
ASX-daml-project-cancelled-Chairman Apologizes After Writing Off 165 Million Blockchain Project.pdf file
Australia Securities Exchange, ASX, the country’s primary securities platform, has pulled the
plug on a six-year project to move much of its workflow to a shared, distributed ledger
similar to the blockchain. The decision will result in a pre-tax charge of $165 million to $171
million in the first quarter of next year but won’t impact dividends, according to a statement
released by the exchange on Thursday in Sydney.
Clearing House Electronic Subregister System
(CHESS), the potentially groundbreaking project to accelerate settlement times and reduce
the costs, was set to go live two years later. Instead, it was canceled after an independent
review by the accounting firm Accenture and an internal review by ASX.
ASX’s project was heralded
as the flagship of institutional adoption of blockchain, helping its technology partner, New
York-based Digital Asset Holdings, raise $307 million
Another early Digital Asset client is the Depository Trust & Clearing Corp. (DTCC),
which is behind over $1 quadrillion in trades annually. DTCC is looking to DLT as a way to
speed up its processing activities. The DTCC work was delayed for years and only recently
began to employ other blockchain technology to process 100,000-160,000 equity
transactions daily. ASX was last year listed as one of Digital Asset’s clients in a $120 million
Series D capital raise. The DTCC has not replied to request for comment at the time of
publication.
Digital Asset supported ASX Project
Through Daml, issuers and end investors gain better, timelier access to information and greater control and confidence in their securities processing. After a successful prototype, ASX announced that Daml-driven distributed ledger technology (DLT) would replace CHESS. Its ability to support the stable, orderly function of this high volume market was confirmed by third party security reviews
ASX has also recently launched Synfini, a “DLT as a Service” platform that allows customers to build their own enterprise DLT applications and solutions on the same VMware Blockchain and Daml technology that the ASX is using for its CHESS Replacement project.
The “DLT as a Service” solution includes three elements:
The ledger and associated infrastructure, including the databases, which write, hold and save transactions among participants.
The customer nodes and access to the provider’s ecosystem, which includes secure networks and connectivity.
A sandbox for common libraries, applications, data rights and developer community-built tools.
The Daml-powered DLT solution that underpins CHESS+ provides multi-party, automated, and simplified workflows that benefit a wide cross section of the market.
A modern, open source application framework enables software to be developed rapidly and delivered efficiently. Able to work on any DLT node, enhancements can be implemented quickly to foster innovation for the entire market.
Real-time data eliminates the need for messaging and associated reconciliation, as users remain perfectly synchronized to source-of-truth data.
Operating and technology costs and risks are reduced. Clearly defined roles remove gaps and end redundancies, while reusable application code and shorter development lifecycles minimize technology spend.
Shared, asynchronous workflows streamline functions to create efficient, faster settlement.
A private, permissioned network restricts access, embeds privacy, and uses cryptography to ensure security. Information is shared only with those who need to know, when they need to know it.
Transactions complete only if conditions are met. All steps are fully traceable and auditable.
Fully compliant with systemic market infrastructure regulations, including Australian Securities and Investments Commission and the Reserve Bank of Australia, CHESS+ is scalable to support future growth without affecting performance.
Candidate Solutions
FED project Hamilton for CBDC - Phase 1
Boston FED, MIT research on CBDC - 2022
https://news.mit.edu/2022/digital-currency-fed-boston-0203
MIT hamilton github architecture overview
Vipin's Forbes review of Hamilton CBDC project
m Digital Currency and CBDC - has details on OpenCBDC project at MIT
Step-by-step guide for Example
sample code block