Distributed ledger technologies for securities settlement – the case for running T2S on DLT

Taudes, Alfred and Hackel, Jakob and Haunold, Wolfgang and Hermanky, Hannes (2021) Distributed ledger technologies for securities settlement – the case for running T2S on DLT. Monetary Policy & the Economy, 2021 (Q2). pp. 13-33. ISSN 2309–3323


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With a view to developing the Eurosystem’s TARGET2-Securities (T2S) system further, we propose a system based on distributed ledger technology (DLT) that covers all major T2S settlement functionalities and investigate it with regard to regulatory compliance, performance, cost efficiency and risk. The system we propose is a federated system comprising European central banks and central securities depositories (CSDs) as node operators. The role of the central banks is to maintain the cash accounts; provide regulatory-approved “smart contract factories” defining workflows for securities issuance, lifecycle management and matching, settlement, auto-collateralization and corporate actions; and perform the oversight function. The CSDs maintain securities accounts, offer notary services for issuers, perform corporate actions, and carry out settlement. CSD nodes collect settlement requests from external trading and clearing systems, forward them to other CSDs for cross-border settlement, bundle them into transaction blocks and prepare the blocks for settlement. The ensuing ledger updates occur via a fully automated consensus process between the central banks. In T2S on DLT, specialized smart contracts provide the flexibility to settle a range of digitally represented assets, define novel workflows – and allow for variable settlement times. Rather than having to conform to a uniform settlement time of T+2, participants can choose among smart contracts that settle within seconds or longer periods of time. This feature is expected to reduce capital costs and, given the DLT-based enforcement of settlement discipline, settlement failures. Apart from conforming to the current regulatory requirements, the DLT framework also enables the central banks and authorized actors to conduct status checks at a granular level and in real time.

Item Type: Article
Keywords: distributed ledger technology, securities settlement, smart contracts, TARGET2-Securities
Classification Codes: JEL: E44, G21, G23, K22
Divisions: Forschungsinstitute > Kryptoökonomie
Version of the Document: Published
Variance from Published Version: None
Depositing User: Sigrid Pratsch
Date Deposited: 07 Jul 2021 15:17
Last Modified: 07 Jul 2021 15:17
FIDES Link: https://bach.wu.ac.at/d/research/results/100657/
URI: https://epub.wu.ac.at/id/eprint/8203


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