This week has been a busy one for the London Stock Exchange Group. The group announced plans to build an on-chain settlement capability, the LSEG Digital Securities Depository (DSD) and a partnership with Apex all within a few days.
As the group’s expansions into digital assets ramp up, we sat down with Bud Novin, the head of payment systems in the group’s post trade solutions team to discuss its new digital settlement service, Digital Settlement House (LSEG DiSH).
The open-access platform enables programmatic and instantaneous settlement between independent payment networks, both on- and off-chain.
Q: Why did LSEG make the decision to expand into digital assets?
“When we started hearing about the issues in the market regarding tokenisation and digital assets, my opinion became strong that while the ‘hard stuff’ of tokenisation had been done, a missing component was the necessity of a working cash solution to enable large networks.”
“Without a viable cash solution, the demand for intraday repo or intraday FX on the blockchain won’t materialize. Stablecoins don’t work for this because you can’t meet contractual cash flows or CCP calls, or manage liquidity for risk purposes; if payments moved entirely to stablecoins, bank balance sheets would shrink, which would constrict their ability to write loans.”
Q: How does DISH solve the problem?
“We have the perfect solution because we can sign members up to a network where they don’t have to bank at the same commercial banks. We allow Party A to deliver cash to Party B even if they bank at different institutions. For example, if Party A banks at Bank 1 for dollars, Party B doesn’t need to have an account there. Party A can on-ramp cash into the LSEG account 24/7. Whether it is on- or off-chain, we can change the beneficial ownership of that cash to Party B instantaneously.”
“The intraday repo is really interesting. Being able to match your intraday liquidity needs to a product that matches that need—instead of using overnight—could save you 90% on your repo rate. For people who want to trade crypto derivatives versus physical, having a way to see on a screen that you can turn your stablecoin into cash at a participating bank instantaneously for a small fee is a game changer.”
Q: What are the specific use cases?
“We also see a strong link between crypto derivatives and physical assets. Currently, if you sell a physical asset and receive a stablecoin, you can’t use that stablecoin to cover your clearing house margin.”
“We are also looking at tokenised money funds. Even if the credit quality is perfect, e.g. because it’s a basket of treasuries, you can’t always rely on the provider for redemptions in a crisis because they might have to ‘break the buck’ to meet demand. Instead, you should be able to go to the repo market and ask who will lend cash against that tokenised money fund. Since it is a basket of treasuries, people should be willing to lend against it, but you need the mechanism to exchange that tokenised fund for cash that can actually be used to meet contractual cash flows or variation margin (VM) losses.”
Q: Is real-world testing possible yet?
“The idea that ‘the infrastructure isn’t there yet’ is changing very fast. We have already conducted tests on the Canton Network with two high-frequency trading firms. Before our full-scale launch this summer, we will have completed off-chain intraday FX trades between four or five banks. We have one of the biggest asset managers about to go live and perform repos with tokenised bonds and DiSH cash across different jurisdictions.”
“We’ve proven this through the Canton Network with firms like DRW and Virtu, where assets were held in one trade in Europe, another in DTCC, and others custodied by SG or Eurex, with us providing the cash leg for all of them. Over the next few months, we will demonstrate cross-currency repo, repo with stablecoins and repo with money funds. As a service, we are open access, so expect to expand to other chains too.”
Q: Why are so many firms starting to expand into digital assets now?
“No one wants to be caught on the back foot or have to explain why they didn’t have a strategy for digital. So, it is inevitable that people would be thinking about being able to move money instantaneously and get PvP (Payment vs. Payment) and DvP (Delivery vs. Payment) 24/7 for margining, liquidity, trading and risk.”
“It’s amazing that people are still sending a billion dollars and waiting to get a billion euros back. We can solve that tomorrow. We’ve already solved it in our SwapAgent business on a once-a-day batch process, but there’s no reason we can’t do it for non-cross-currency swaps. We don’t need to value something to be able to perform a settlement function.”
“It’s about cost. If you know you can get cash quickly and cheaply, you don’t have to liquidate your money fund to meet a short-term liquidity need. You can keep ownership of your money fund and just go to the repo market for two hours of borrowing.”
“The key is that you won’t have movement until you have real networks that can use this solution with each other. Having a universal cash form that everyone trusts and uses is the thing that unlocks all the potential possibilities.”
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