Switzerland’s market regulators FINMA have approved long-held plans by the country's exchanges operator SIX to set up its SIX Digital Exchange (SDX) -- a stock exchange and a central securities depository for digital assets which will use distributed ledger technology (DLT) for settlement and asset servicing.
The landmark decision by regular FINMA comes three years after SIX first proposed the trading environment for tokenised assets. (SIX is a "mainstream" and established markets actor owned by 122 Swiss and international banks which runs exchanges and centralised securities depositories in Switzerland and Spain. SIX also operates Switzerland’s payment infrastructure for the Swiss National Bank.)
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Getting regulatory approval has required intensive discussions with regulator FINMA about transaction monitoring, know-your-customer (KYC) and anti-money laundering (AML) requirements. Sign-off means SIX can now proceed with building what it hopes will prove a "global exchange network for digital assets."
Thomas Zeeb, Global Head, Exchanges, SIX, said: “This is an important milestone in providing institutional investors with a safe and robust infrastructure meeting all of the core requirements of a traditional exchange and CSD infrastructure... [and] bringing the digitalization of capital markets into the mainstream.”
Speaking with The Stack in depth about the SIX Digital Exchange earlier this year, Zeeb said: “I truly believe that we are going to see more changes in how capital markets function over the next 15 years than we’ve seen probably in the last 400 years. The payments and securities areas are going to change very, very dramatically."
He added: "We want to be both shaping that, and at the forefront of this shift.”
The company has worked closely with enterprise DLT specialist R3, using their Corda platform in building the SDX. The trading front-end however will continue using a modified Nasdaq platform; but as soon as matching happens, it goes into the DLT environment for settlement and asset servicing meanwhile.
Pressed for real-world examples of how the SIX Digital Exchange might be used in future, Zeeb said earlier this year: "One of the simple use cases we have, which is around loan syndications."
He explained: "Today, to get debt off a bank’s balance sheet, you securitise it, and you syndicate that loan; you don’t need tokens to do that. However, with a distributed ledger, you can go out to many, many more investors all at once without having to count on a cascade effect. You can be much more efficient in finding investors for these loans, by using a distributed ledger – and putting a token on that ledger is the natural way that you would do it: it allows you to fractionalise it, and also means that instead of having a small group of investors, you can go up to hundreds of investors, and they all have the same amount of information at exactly at the same time. That is very appealing for instance, for banks, which are looking to reduce their balance sheets, particularly under Basel IV coming in a few years; as well as increasing the efficiency of how you get to investors.
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Zeeb added: "Another example is so-called non-bankable assets. We’re in discussions with a couple of issuers who would like to take artwork and tokenise it. If you as a private investor went to your bank and said, I want to have 5% of my portfolio, maybe I’ve got 50,000 to invest, I want 5% exposure to fine art, they will be able to put you into a token that is fine art-related, rather than saying either you’ve got to put in a lot of money and buy a piece of artwork, or go into a fund structure, which is also a relatively expensive structure. That’s two examples of products that you can put on the exchange, then trade in a liquid secondary market.
SIX's Head of Markets added: "From a cost point of view, the benefit is really on the post-trade side. Normally, if a corporate action is happening, you would have an income or paying agent in, say, the United States give the information to DTCC; DTCC would give it to the US custodian; the US custodian gives it to us; we process it; we give it to our bank client; the bank client takes it and gives it to their end client. So you’ve got four or five sets of clerical specialists on the corporate action site touching this transaction. If you do that on a distributed ledger, you do it once, and everyone has that information at once. That eliminates so many layers of potential errors and cost between the issuers paying agent and the end investor: you do it in one step; that’s a huge saving."