One of the most touted benefits of distributed ledger technology (DLT) for securities is atomic settlement. This is the blockchain equivalent of delivery versus payment (DvP) – the securities and cash are exchanged simultaneously, preventing either of the parties from being out of pocket if the other side defaults. However, it’s also known to impose higher cash or liquidity requirements on the counterparties, eliminating the benefit. A new research paper argues that if settlement is delayed for as little as ten minutes to an hour, with netting it’s possible to achieve most of the benefits of a one or two day settlement window.
In the crypto world, atomic settlement often infers instant settlement, but doesn’t have to. The atomic exchange rather than the immediacy reduces risk most. In 2019 the DTCC wrote a paper arguing against instant settlement using DLT.
The rationale is if you made ten buy and sell trades with various counterparties during a day, you might need to come up with $10 million in cash at different times with atomic settlement. In contrast, netting the settlement at the end of the day might only require a $500,000 payment. In today’s traditional finance (TradFi) markets, the DTCC is the biggest central counterparty operator providing netting capabilities or deferred net settlement.
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