Shanghai Stock Exchange Explores DLT Use In New Research Paper


Shanghai Stock Exchange (SSE), one of the world’s largest securities trading venues by market capitalization, is pushing for the use of distributed ledger technology (DLT) in the securities market.

The SSE published a research paper on Tuesday, which analyzed the use of DLT in various stages of a security transaction, such as the pre-trading customer registration, securities issuance and trading, and post-trading settlement.

It went on to summarize some key benefits of adopting DLT in China’s financial infrastructure, such as increasing the settlement efficiency by replacing the current T+1 model, under which a transaction can only be settled one business day after an order is executed.

As the world’s fourth largest stock exchange by market cap at $5.12 trillion as of December 2017, the SSE is a non-profit organization directly administrated by a government agency, namely the China Securities Regulatory Commission.

With references to existing works done by its counterparts in other financial markets such as Hong Kong and Australia, the paper’s author identified two potential areas where DLT may be beneficial in China, adding:

“A general worldwide consensus is that DLT will be a new revolution for the financial industry. The first application use cases will be over-the-counter securities issuance and trading, as well as order book post-trading settlement.”

That said, the research paper suggested that a potential deployment of DLT in the Chinese stock exchange could still face a series of regulatory hurdles as it is in conflict with the current centralized registration and settlement system.

For instance, the SSE currently uses a third-party intermediary to keep custody and settle post-trading transactions. Therefore, the use of DLT could fundamentally eliminate that system. And to do that, the market needs new legal framework issued by regulators and central government agencies.

The author concluded:

“Regulation should adapt to the evolving technology. We suggest regulators treat the topic of DLT as a crucial study area moving forward … in order to develop a solid regulatory framework for embracing the financial innovation.”

Shanghai Stock Exchange image via Shutterstock

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