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Swiss stock market operator SIX's Head of Markets Thomas Zeeb on the digital future of exchanges.

"We are going to see more changes in how capital markets function in the next 15 years than in the past 400 years.

SIX operates the infrastructure of the Swiss financial market, running exchanges and centralised securities depositories (CSD) in Switzerland and since 2020, Spain. SIX – owned by 122 national and international financial institutions – also operates Switzerland’s payment infrastructure for the Swiss National Bank. Yet, for all of its centrality to markets at the heart of one of the world’s oldest and most storied financial centres, the privately held company is no change-resistant institution wedded to the past. Executive Board Member and Head of Markets Thomas Zeeb is frank about disruptive change – and embracing it.

He tells The Stack: “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. We want to be both shaping that, and at the forefront of this shift.”

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With the roots of much financial market infrastructure (FMI) – the exchanges, clearing, settlement, central securities depositories (CSD), and payment systems that support the world’s monetary and financial markets participants – largely set in place architecturally during the 1960s and 1970s, SIX is building a “digital infrastructure for the new millennium” including a distributed ledger-powered SIX Digital Exchange (SDX).

The SDX platform is built and inching closer to regulatory sign-off to begin trading later this year . SIX plans to offer issuance, listing, trading, settlement, servicing, and custody of digital assets on it, with streamlined and automated asset servicing and post-trade processing. The ultimate aim: to create a “ trusted, global, integrated, institutional liquidity network and ecosystem for the issuance, trading & settlement, transfer and custody of digital assets in both public and private markets – as well as regulated digital securities and crypto assets underpinned by advanced analytics capabilities.” We sat down to talk with Thomas Zeeb about the project.

Tell us about your role.

I run the global exchanges business unit at SIX, which covers the four exchanges we run from Madrid plus Switzerland, and the digital exchange we are building here in Switzerland. I've been with SIX for 13 years now. I started on the post-trade side, then payments. We restructured three years ago, and I took on both trading and post-trading. With the acquisition of the BME business, I've taken over all the group listing and trading activities.

Can you give a snapshot of a day-in-the-life, your primary focus?

The primary focus is operationally working with the various teams elsewhere in the group to ensure that things are running smoothly and that we have resilience and robustness built-in to the core platform. Then we have a large project running to integrate the Spanish exchange business more closely with ours. That entails a number of different elements, including a platform replacement in Madrid;  not something that's done in six months.

Obviously, there's a lot of work going into that, as regards defining what exactly the product requirements are going to be.. What the differences are in the Spanish market. How we can use standardised platform capabilities as much possible, so that future product development activity needs to be done only once. That’s a long term project: it's going to take us until mid-2022, to start really having the platforms consolidated.

The third piece that is taking a fair amount of my time is the imminent launch of SDX, the digital exchange.  We're now in the final stages of preparing everything to get regulatory approval and the licence to operate. We're working very closely with FINMA [the Swiss Financial Market Supervisory Authority], to deliver everything they need. We have clients with use cases queuing up, so we are excited to move forward.

What is the SDX architecture look like? What is it built on?

We're working very closely with R3, using their Corda platform. We've developed applications on top of this platform. The trading front-end is our standard – well, modified, but based on – the existing Nasdaq application that we have in the traditional market for trading. So we have that as the front-end trading engine for the digital exchange too. The reason is very simple: certainly for the foreseeable future, there will be less liquidity in the digital assets that are being listed. It doesn't make sense to fragment that even further by putting it [the front-end of trading] into a distributed ledger environment. So, that is traditional technology, based on a very good trading engine from Nasdaq, which we're very familiar with. But as soon as the matching happens, it goes into the DLT [distributed ledger technology] environment for settlement and asset servicing.

What was the genesis of the SDX? Was it your brainchild?

It comes out of various discussions with people in the market; but it was my project to sell to the board and to set up and run. The original intent is very clear: I truly believe that we are going to see more changes in how capital markets function over the next 15 years than we've probably seen in the past 400 years.

Digitalisation allows for huge changes in how assets are listed. Fractionalisation of tokens will dramatically change how assets are held and traded. The entire payments and securities areas are going to change very, very dramatically over the next few years. We want to be both shaping that, and at the forefront of it.

How big a challenge is it to move to a fundamentally different platform like this?

One of the challenges that I think most banks and other intermediaries in the market have, is that we're all still working on legacy platforms that have developed over many, many years. The switching costs to move from those is very high. That makes it difficult to move away from relatively high fixed-cost platforms to platforms that are more flexible and more scalable in both directions, not just upwards. This is where we truly believe that distributed ledger has a role to play. But you have to introduce it over time. Banks are not going to move from today to tomorrow into a digital-capable environment, with digital wallets and all the other stuff that goes with it; that's just not realistic. The institutional market -- what we serve -- is one that brings a robust set of requirements, and flow to the table, but is not one that you can change overnight.

This is why we set up SDX in parallel to the existing infrastructure and start with new native digital listings. That gives the opportunity for banks and other intermediaries to start to become more comfortable with the technology. And over time, I then expect to get into a position where probably in five to seven years’ time, we will start talking to the marketplace, here, about tokenising existing assets in the existing CSD [Central Securities Depository] infrastructure... then it'll take another two or three years to actually get there.

You're really talking about a 10 year transition from traditional to digital.

Let’s step back a little: why do we need DLT-powered exchange to start with? You mentioned use-cases; talk us through some.

Let's start with one of the simple use cases we have, which is around loan syndications.

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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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.

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.

What are the regulatory pain points here?

Actually setting up an exchange and settlement custody environment for digital is not that difficult; there are plenty of them already out there, both on the cryptocurrency side, as well as in some other environments; we had a prototype ready, we were running end-to-end already in July 2019 -- what takes the real amount of work is on the one hand, building the capacity to handle the kind of volumes that an FMI full market infrastructure would be expected to be able to handle. It's less ‘pain point’ than it is understanding how in this distributed ledger environment, they'll be able to have full oversight on what's going on; making sure that all of the processes behind it are appropriately documented, as regards transaction monitoring, anti-money laundering, KYC activity, the full gamut of activities that a regulated entity needs to be able to provide.

These are all essential functionalities that are secondary to the core of actually being able to trade, settle, and customise but they're extremely important if you want to be a regulated entity. Putting all of that together and making sure it's got the capacity to handle the kinds of volumes that we would expect to see over time is really where the work has gone. That's where we're working with external auditors who are auditing our processes, and providing the reports to the regulator, so that the regulator is comfortable at the end of the day, with our approach and how we're using both tokenisation and digitalisation to achieve our mandate.

How much of an education process is this for the regulator? And indeed, even on the auditor side?

The educational process is huge, but it's not just for the regulator, it's for all of us.

We're all learning our way through this. I think from an auditor's point of view, it's a little bit more straightforward, because they're auditing – at the end of the day – the core functionality. Things like AML requirements and so on, they're clear: you either meet them or you don't meet them. Making sure that we have covered that off with the different technology is a challenge and making sure that FINMA is comfortable with the mechanics of how that works, has been a challenge -- but it's a learning process for all of us.

I think FINMA has been extraordinarily constructive in the process.

They're very, very helpful in terms of sitting down with us and working through scenarios and saying, 'no, you can solve it like this, you can solve it like that'. They're not taking the sort of stereotypical view of leaning back folding their arms and saying, 'well, when you're ready, send us an application'; they're as keen as we are to move the market forward. So while they clearly have their oversight function, we've been working very closely with them on both the legislative side, as well as the operational and documentational side, to ensure that what we're delivering meets all of the requirements, and that everybody's actually comfortable with that process.

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