The Digital Catalyst for Post-Trade Transformation

[Music] so post trade remains one of the most outdated and inefficient areas of financial markets um front office trading has been transformed over the years by automation by um uh a significant amount of investment into it postrate processing on the other hand and by that I mean settlement clearing collateral management that still relies on largely on Legacy infrastructure often decades old um it relies on manual workflows and processes it relies on batch processing um uh in in predefined cycles and these inefficiencies together they create or they cause Capital constraints um they cause liquidity bottlenecks and significant operational risk overall so for financial institutions the the

consequences are actually pretty severe collateral gets trapped in these fragmented systems which prevents inefficient which prevents efficient margining and it increases the cost of funding um traditional settlement systems many of which are still t+1 or longer require firms to prefunds which means holding excess collateral buffers around the globe and ultimately that means limiting the your ability to participate in that market and these inefficiencies Force financial institutions to operate with liquidity constraints and and frankly excessive risk exposure that's not actually due to the trade and so this challenge is even greater in the in the crypto markets where institutions rely on

overcollateralization as a matter of of common practice um this is due to a lack of an Institutional grade margin and risk management infrastructure in those markets it's in demand for it but it's it's not there yet um and so what we're doing is Kenton network is focused on addressing these issues directly by enabling instant collateral m ility across financial and digital assets trafi and digital assets reducing the need for excess Capital buffers and improving Market liquidity overall um with Market shifting towards 247 trading tokenized assets and specifically tokenized real world assets and the real-time settlement that goes with them institutions that that sort of fail to pursue this

modernization of postrate infrastructure will ultimately face higher funding costs increas counterparty risk and and ultimately decrease competitiveness what we're doing with Canton network is to provide an integrated blockchainbased solution that eliminates these frictions improving collateral allocation and enhancing overall Market uh efficiency yeah so just to set the stage for um uh for some comments um Cloud Mobility is critical for managing liquidity overall um uh liquidity across trades and investing it's critical for optimizing Capital use and increasing ultimately trading capacity yet currently only about 10% of eligible collateral is actively being used only about 10% of the demand

for collateral globally is actively being met and this is largely due to settlement delays regulatory constraints and inefficient Market structures Legacy structures that prevent institutions from allocating assets dynamically with kanton Network what we're focused on doing is having a more dynamically based collateral allocation and Mobility model institutions can instantly reallocate collateral across jurisdictions across Clearing Houses across counterparties and what that means is it will reduce the capital that's tied up in what were previously inefficient buffers and that means you'll get expanded liquidity and expanded trading capacity um now that's a risk management Focus Beyond risk

management collateral Mobility also directly increases the ability to trade more and invest more um today's markets operate on standard collateral requirements which sort of force Market participants to over collateralize even when their individual risk profiles may not require it right so it's sort of a cookie cutter approach to Collateral requirements um by leveraging Advanced margin Management Solutions um exchanges CCP p s bilateral counterparties they can begin to tailor the margin requirements to specific trading profiles investor profiles rather than enforcing sort of a rigid overcollateralization one-size fits-all Market model and the flexibility to do that becomes possible with a

platform like like Canton Network and and probably our best example of this is the work that um was recently announced earlier this year with qcp where we're working with them to enable a realtime margining solution for crypto derivatives and we're focused on on um on implementing a model that will reduce the over collateral overcollateralization that's currently required in derivatives crypto uh crypto derivatives exchanges and ultimately to get to a program where risk management tools will be available to Market participants and they can move towards a more realtime Capital efficient structure that reflects actual trading risk rather than sort of a blunt instrument of a one-size fits-all

collateral model um this increased collateral Mobility will mean that firms can execute larger trades with less Capital being tied up it can lead to a higher um overall Market participation maybe attracting different types of investing and trading firms that previously would not have been able to um to meet the the collateral requirements and ultimately just a systemic model that has better liquidity and reduced counterparty risk so with with Canton the Traders and like the work we're doing with qcp Traders liquidity providers institutions can now optimize collateral usage dynamically and that un that that unlocks trapped Capital that was previously [Music] unusable so collateral Mobility

determines how efficiently financial institutions can respond to Market needs to meeting obligations and and optimizing collateral overall when collateral is locked in inefficient systems institutions face higher borrowing costs more demands on liquidity mismatches systemic risk across the entire operating system and platform so for example consider um 2020 and the US Treasury Market crisis during the early weeks of of covid-19 demand for cash had skyrocketed skyrocketed and Banks hedge funds asset managers needed to mobilize collateral quickly um however the settlement and the clearing processes lagged behind movements that led to dislocations and extreme price swings throughout the market

if institutions had had access to realtime collateral Mobility through the Canton Network they would have instantly been able to optimize their Holdings to meet margin calls without the Panic driven sell-offs that occurred back then firms often uh often fail to meet collateral obligations not because they lack assets but because those assets are trapped in the wrong place at the wrong time and so the inefficiency that was evident in um in in 2020 also had played out previously in a in the night Capital Market condition that had occurred with its collapse in 2012 and that's where there was an inability to quickly adjust Capital positions that led to excessive losses within hours but if you

reflect on these two things by using canton's blockchainbased collateral Mobility Solutions institutions can gain on demand real-time collateral deployment capabilities they can ensure that they never miss a margin call avoiding unnecessary borrowing costs and ultimately maintaining Market stability yeah Financial crises have have repeatedly shown the consequences of slow collateral movement um I I mentioned a couple already but two additional major crises that are are really illustrative of the cost of slow collateral movement um the first is the one that we all tend to reference Leman brothers and the the 2008 financial crisis so when Lan collapsed institutions were unable to reallocate

Collateral in real time to meet liquidity needs leading to a systemic liquidity freeze just across the market almost instantaneously collateral was trapped um back then due to T plus2 settlement cycles due to uh the knock on effect of counterparty failures and operational B bottlenecks ultim ultimately just exacerbating or creating this procyclical cycle of the liquidity crisis so had firms been able to use Canton Network's real-time collateral ability they could have I'm not going to say everything in the crisis would have changed but but in this one instance they could have instantly reassigned collateral across multiple counterparties they would have had realtime transparent access to

knowing where the collateral was at all time thereby enabling them to reduce counterparty risk and prevent cascading failures um these cascading failures also played out a little bit um in the UK guil crisis in September of of 22 when Pension funds faced sudden margin calls they couldn't move collateral fast enough to meet those margin calls and that led them to force asset sales that accelerated the market spal they were selling the assets that they were trying to raise cash to meet the margin calls but by selling those same assets it was pushing the price down further leading to a higher Margin Call and again creating a procyclical cycle so Market participants were required to post

additional margin against their leverage positions but the process for transferring collateral which should have been risk reducing was too slow to match the speed of the market volatility um they could have using uh collateral Mobility as we see it pledged assets dynamically preventing liquidity shortfall that led to ultimately the emergency intervention of the bank ofland bank of England so beyond these crisises um which are always really good examples but it's the everyday use of of collateral that that ultimately matters most um real-time collateral Mobility could have mitigated these extreme price uh dislocations but it could have led to a more and will Le lead to a more systemically

stable Market condition overall with canton's atomic settlement model the collateral movements and the ability to be able to tokenize real world assets instantaneously would have allowed for collateral to be raised and allocated instantly helping these firms to meet the liquidity needs without creating market-wide disruptions so in you know in all of these cases the ability to move collateral in real time is intensified um by liquidity stress and worsened by systemic risk what Canton network does fundamentally is to solve this problem ensuring that institutions can adapt dynamically to Market shocks rather than well rather than reacting after the damage has already been [Music] done well the

next major Frontier is definitely realtime repo and 247 collateralized financing and to just take a step back today the repo markets and collateralized transactions are constrained by market hours by uh time zone differences and settlement cof offs and this forces firms to hold excess liquidity buffers overnight and over the weekends that leads to increased Capital costs and ultimately limits their trading volume and flexibility which no one wants to happen um with tokenization particularly of real world assets these inefficiencies can be eliminated enabling what would be a truly continuous collateralized 247 financing market and I think a a really good example of this is is broadridge is

distributed Ledger repo platform which is already processing 1.

5 trillion per month in repo transactions using um uh smart contracts and tokenizing us treasuries for those transactions by enabling real-time collateral allocation which is part of that overall solution um firms using drr have achieved nearly 25% reductions in clearing costs and up to 3 to 5 million in annual Capital Savings for firms which is is actually quite significant for for this part of the market but you know but beyond repo a fully interoperable collateral Mobility Network one enabled by canton's privacy preserving architecture can unlock efficiencies across Securities lending across derivatives across crossborder financing um another major study that that we like to reference is

is uh bny and Euro clear is Bridging the collateral divide report which highlighted that inefficiencies in collateral allocation cost the industry billions in trapped Capital each year due to subop due to suboptimal allocation due to rigid custody models and fragmented infrastructure so by integrating real-time collateral networks like Canton into the financing activities of these institutions they can dynamically re reallocate pledged assets they can ensure that capital is always deployed in its most efficient use case and I think that over time what we'll see is a broader ad option in tokenized Securities lending in structured Finance in Dynamic margin management all stemming from getting

to a market model of 247 repo and collateralized financing all of that leads to um greater access on liquidity greater demand of um of of collateralized transactions and the ability to allocate collateral and optimized collateral frankly like we've never seen before yeah well firms that fail to modernize will remain trapped in Legacy and efficiencies that expose them to liquidity bottlenecks Capital constraints and systemic risk um it's really pretty straightforward historically crises like 2008 and 2020 have shown that slow collateral Mobility exacerbates Financial instability and when institutions cannot move assets quickly to meet margin calls the force to sell Securities at distress

prices which in of its itself triggers fire sales that Ripple across the markets a Canton based collateral Mobility solution eliminates this risk by ensuring that institutions can instantly reallocate pledged assets and avoid liquidity shortfalls um I think another key risk that comes from this is higher funding costs without real-time collateral optimization firms must preposition assets around the globe and preposition it often by holding excess capital and and collateral buffers and rely on um uh short-term credit at lines that that often come at higher interest rate and this creates a structural cost disadvantage compared to firms that leverage tokenize collateral and real-time margining

so um with this I think regulatory pressures are also increasing ball three and other Frameworks are pushing for greater collateral efficiency requiring firms to optimize liquidity and funding institutions that fail to to transition to um these types of solutions May struggle to meet evolving compliance requirements facing higher Capital costs and competitive diff disadvantages I think that that ultimately overall the way to think about it is that market fragmentation is a growing concern and what I mean by that is as more institutions move towards tokenized collateral networks those that still rely on manual sort of jurisdiction bound systems may find themselves excluded from the most

efficient liquidity pools and that inability to mobilize assets seamlessly across counterparties and across borders will make them less attractive as trading part partners and further limiting their access to liquidity and the ability to to generate Revenue in the market so I guess ultimately what I would say is that firms that delay adoption are not just missing out on the current efficiency gains of a network model they're exposing themselves to greater risk higher cost and potential liquidity um shortfalls in the future um we so regulatory Clarity has significantly improved I probably would have said that that might have been the the biggest blocker um to dat but that's significantly

improved which I think kind of means that that I don't think there's any fundamental roadblock at this point the real challenge is just simply execution institutions need to move Beyond pilots and start integrating tokenized real World assets into their core Market financing and lending operations um I mean I think the good news is firms are realizing they don't need to overhaul their infrastructure overnight Canton Network allows incremental adoption enabling institutions to deploy tokenized Solutions within existing Frameworks and the biggest barrier is probably complacency the technology is ready firms just need to start [Music]