DTCC: Security Tokens Should Be Made to Meet Existing Regulatory Rules

The Depository Trust & Clearing Corporation (DTCC) has laid out guidelines for the post-trade processing of tokenized securities, aimed at market participants and regulators.

Policy arrangements for traditional market infrastructures – such as the Principles for Financial Market Infrastructures (PFMIs) issued by global regulators – can provide clues to responsibilities that might be applicable to a security token platform providing post-trade services, said the DTCC in a white paper published today.

Put more plainly, the financial market infrastructure provider is calling for new entrants to play by the same rules it does. According to the white paper:

“If a Security Token Platform performs the same or a substantially equivalent function as an existing market infrastructure, thus exposing investors and other market participants to the same type of risk, the legal and other requirements applicable to that function should be the same regardless of whether the function is being performed by an existing market infrastructure or as part of a Security Token Platform.”

The paper lays out several areas for consideration, such as ensuring that a platform for post-trade handling of crypto assets has an “enforceable legal basis,” as well as an identifiable governance structure.

Also highlighted by the DTCC was the need for sound risk management of such platforms, clear and certain final settlement of assets, record keeping and “robust accounting practices, safekeeping procedures and internal controls.”  

Mark Wetjen, managing director and head of global public policy at the DTCC, said that when most people think of markets and the trading of an asset, usually they are focused on what happens before or to the point of execution of a trade.

“But what occurs after a trade is executed is critically important and this issue has not been broadly discussed within the context of tokenized securities or crypto assets more generally,” he said in a statement.

Safety and soundness

Wetjen, who is also chairman of the board of DTCC’s Deriv/SERV, said the framework DTCC has developed identifies the key issues that need to be addressed by those seeking to establish policy, rules or best practices to govern the conduct of entities providing post-trade services for crypto securities transactions.

“In our view, these issues are fundamental to protecting investors and establishing trust in the safety and soundness of security token platforms.”

No stranger to distributed ledger technology, DTCC began testing its DLT-based credit derivatives Trade Information Warehouse (TIW) in November with U.K.-based Barclays and 14 other unnamed banks. Testing is anticipated to be completed by the first quarter of 2019 with go-live scheduled thereafter.

But while that initiative is aimed at optimizing an existing business with the technology, Wednesday’s report is about managing the risks of a new one created by it.

The timing of the report is also notable as it coincides with a warning on crypto assets from the Basel Committee on Banking Supervision, also issued Wednesday.

“Crypto-assets have exhibited a high degree of volatility and are considered an immature asset class given the lack of standardization and constant evolution, “ said the committee, which sets international standards for bank capital, liquidity and safety-and-soundness regulation.

“They present a number of risks for banks, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering and terrorist financing risk; and legal and reputation risks.”

Image of DTCC Fintech Symposium 2017 via CoinDesk archives.