Transforming Equity Markets

This approach is potentially the most disruptive threat to existing equity markets, with XDEX being used to replace most of the traditional intermediaries and processes in equity markets.

By embedding the governance, risk, and compliance metadata through XDEX and listing securities directly on public blockchains – either on their own or with the help of broker dealers or banks – issuers could eliminate many of the processes associated with each component of the value chain (e.g. operations designed for legacy environments or required by current regulations).

Security tokens are one area where traditional markets could intersect with DeFi (decentralized finance), through decentralized exchanges, allowing for multiple trading venues across multiple global jurisdictions and a range of additional applications.

While, to date, the focus has been on private shares – whose fragmented markets and largely manual processes will benefit from the potential for standardization and automation offered by XDEX – we are one of the only companies working to build a future blurring of the lines between traditional publicly listed equities and tokenized private company shares.

Major changes from current state

• Rather than issuing on a centralized exchange with a single CSD, tokens would be issued on a public or permissioned blockchain with the necessary XDEX governance, risk, and compliance metadata embedded to provide true portability.
• Investors can now access markets and trade through multiple decentralized exchanges.

Proposed benefits

• Potentially significantly lower cost of issuance, thereby opening access to smaller firms.
• Without consideration for legacy architecture or processes, this is a likely easier path to realizing the workflow and operational benefits offered by XDEX.

XDEX becomes an end-to-end digital platform to integrate the full life cycle of securities and other digital assets. The platforms enables market participants and intermediaries to list or issue, trade, settle trades and provide custody services for digital assets – in this case, digitally native equity tokens – in a fully regulated environment. XDEX can exist in parallel to existing market infrastructure and existing securities markets, offering an alternative digitized version of a standard asset class.

While XDEX becomes be the core technology on which the “Central Securities Depository” is maintained, some functions/processes may use existing technologies. This approach does not necessarily disintermediate any parties, although some roles may become redundant.

Major changes from current state

• XDEX becomes a single, shared source of truth on all aspects of the security, including ownership and post-trade activities
• Enables programmability of securities from issuance
  Introduces the ability to settle certain trades on a shorter or more flexible timeline
• Investors and issuers can interact directly with market infrastructure or exchange (or with one another)

Benefits

• Greater transparency for all parties – Potential to reduce complexity in operations and/or operational burdens associated with reconciliation activity
• Streamline and automate all processes associated with servicing the security, clearing and settling and/or maintaining compliance
• Enables better balance sheet management (e.g. reduced funding requirements for risk capital, clearing fund and/or settlement liquidity)
• Issuers can list directly and/or have greater transparency of ownership, without relying on additional intermediaries, potentially lowering cost of capital

XDEX can supplement existing market infrastructure to address specific challenges. While specific approaches can vary, XDEX can automate clearing and settlement processes while still relying on the core underlying CSD. This can enable greater flexibility or speed in settlement, or alternatively could enable bilateral (rather than central) clearing for certain transactions.

Importantly, these use cases do not require the entire market ecosystem to migrate to XDEX, enabling a subset of operationally prepared parties to benefit from advantages offered by the platform. Though focused on improving existing processes via XDEX, this approach can potentially reimagine a portion of the equities value chain.

Major changes from current state

• Ability to settle atomically on a continuous basis or net settlement obligations on a bilateral basis, rather than novating trades and clearing centrally in batch processes.
• Potentially introduce the ability to settle certain trades on a shorter timeline.
• Introduce a single, shared source of truth on settlement instructions/obligations, accessible by all relevant parties (or a subset of parties) for specified transactions.

Benefits

• Clearing participants do not need to capitalize the central counterparty, but need only to fund margin for their own settlement obligations, thereby freeing up liquidity.
• Enable better balance sheet management (e.g. reduced funding requirements for risk capital, clearing fund and/or settlement liquidity).
• Ability to mutualize and automate workflows across parties, and potentially conduct processes in parallel (with potential to reduce settlement time as a result).
• Greater transparency into settlement status and open positions throughout the day.

XDEX is uniquely suited to optimize post-trade operations and life-cycle management, by:

• Reducing settlement risk and/or settlement time frames or enabling greater flexibility in settlement time frames.
• Synchronizing references and mutualizing workflows across all parties involved in trading, settlement, custody or corporate actions, thereby limiting the need for manual reconciliation
• Automating settlement instructions and/or corporate actions processes using smart contracts
• Reducing settlement risk and/or settlement time frames or enabling greater flexibility in settlement time frames
• Introducing the ability to conduct non-batch delivery vs. payment (DvP) settlement
• Providing a single source of truth on trade data, accessible by all participating parties (via a node on the XDEX network and API interface)