New York/London/Hong Kong/Singapore/Sydney, March 13, 2019 ‒ The Depository Trust & Clearing Corporation (DTCC), the premier market infrastructure for the global financial services industry, today published a white paper that outlines function-based guiding principles for regulators and market participants for the post-trade processing of tokenized securities. The market for trading crypto assets that are security tokens where the post-trade processing uses distributed ledger technology (DLT), has created a need for safety, security and reliability around these transactions to protect market stability.
DTCC highlights that DLT introduces characteristics that are distinct from the market structure for traditional securities, therefore creating unique requirements in the design and application of appropriate regulations and post-trade processing structures.
Global standards that inform policy for traditional market infrastructures, such as the Principles for Financial Market Infrastructures (PFMIs*), can help guide stakeholders to define the types of responsibilities that might be applicable to a security token platform providing post-trade services.
In addition, DTCC identified several factors that could prove essential to the development of regulation and industry rules to govern the post-trade processing of security tokens or other crypto assets. For example, responsibilities for post-trade services should be promulgated in appropriate rules and regulations, assigned to an entity – regardless of whether it is vertically integrated with the trading platform – and appropriately enforced for a security token platform to operate in a manner consistent with the public interest.
According to the white paper, “Guiding Principles for the Post-Trade Processing of Tokenized Securities”, the following responsibilities should be expected of any platform that provides post-trade processing of security tokens:
A platform providing post-trade processing services for crypto assets should have a well-founded, clear, transparent and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.
A security token platform should have appropriate governance arrangements to support the operation of the platform. The governance structure should, at a minimum, include effective rules regarding functionality and risk management.
No matter its structure, a security token platform should have a sound framework for comprehensively managing legal, credit, liquidity, operational and other risks.
A security token platform (or one or more of its components) should have appropriate rules and procedures in place to help ensure the integrity of securities or security token issues and minimize and manage the risks associated with the safekeeping and transfer of securities for which the platform is responsible. The security token platform should have robust accounting practices, safekeeping procedures and internal controls that fully protect assets for which the platform is responsible.
7. Recordkeeping Requirements
The security token platform should demonstrate how it manages the privacy and confidentiality of appropriate records while maintaining their accessibility to regulators and appropriate third parties such as external auditors.
*PFMIs articulate key principles for financial market infrastructures and other key regulations.