New paper offers guiding principles on the provision of post-trade services for crypto assets, including on the governance and risk management structures needed to protect market stability.
DTCC (Depository Trust & Clearing Corporation) has released a white paper with its guiding principles for post-trade processing of tokenised securities, aimed at promoting safety and confidence in tokens.
The white paper lists guidelines for regulators and other participants to use when thinking of enhanced security for token platforms. It lists principles like demonstrating a legal basis for providing post-trade services for crypto assets, having an identifiable governance structure, procedures for risk management and final settlement, demonstrating resilience, and having issuance, custody and asset servicing capabilities.
“In our view, these issues are fundamental to protecting investors and establishing trust in the safety and soundness of security token platforms. 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,” said DTCC head of global public policy Mark Wetjen.
“But what occurs after a trade is executed is critically important and this issue has not been broadly discussed within the context of tokenised securities or crypto assets more generally.”
According to the paper, a platform providing post-trade processing services for crypto assets should have “well-founded, clear, transparent and enforceable” legal basis for every material aspect of its activities in all relevant jurisdictions.
Platforms should also have appropriate governance structures to support their operations, including effective rules around functionality and risk management, as well as sound frameworks for managing legal, credit, liquidity and operational risks.
Rules and procedures should also be in place to help ensure the integrity of securities or security token issues that minimise and manage the risks around the safekeeping and transfer of securities for which the platform is responsible. Platforms should be able to demonstrate that they can operate safely and have a high degree of resilience and security.
As trading in crypto assets goes up, there is a need for safety and reliability around crypto transactions to “protect market stability”, the DTCC said.
DLT (distributed ledger technology) introduces distinct market structure concerns compared to traditional securities that create unique requirements in the design and application of regulation and post-trade processing frameworks.
DTCC said that while global standards like the PFMI (Principles for Financial Market Infrastructures) can help guide the market in defining the type of responsibilities that are applicable to a security token platform providing post-trade services, it has identified several other factors that can prove essential to developing regulation and industry rules to govern such platforms.
For example, the DTCC says that the responsibilities for post-trade services be laid out in the relevant rules and regulations, assigned to an entity and appropriately enforced for a security token platform to operate in a manner consistent with the public interest.
“The framework DTCC has developed identifies the key issues that we believe 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 transactions,” Wetjen added.