July, 20209 horizontally integrated models should introduce different and new value creation areas. These areas will require new skills which incumbents could offer.Since a digital asset's smart contract would model the asset's lifecycle activities and enable automated investor and compliance rules management, its construction will need close interactions with issuers to create the digital asset such as a "DLT bond" before it is introduced into the digital environment.This makes the client-facing construction of a DLT bond or other digital asset an activity that needs to be completed prior to the asset' entry into the walled-garden. Today's incumbents can take on this constructor role albeit with new multidisciplinary capabilities. The horizontally-integrated digital infrastructure would then provide a cybersecurity-safe digital trading and settlement environment for the programmed digital assets.· DLT-enabled post-trade enginesThe second type of digital environment is represented by the ambitious work of the Hong Kong Exchanges & Clearing group (HKEX) and Australian Securities Exchange. The work aims to embed DLT into their core post-trade engines and workflows, and address immediate industry issues. This introduces the DLT concurrent communication paradigm and methods to the processing of traditional asset classes like equities without digitising these asset classes.For example, HKEX Project Synapse proposes a shared industry utility, concurrent communication flows and common data definitions between market participants to improve the Hong Kong-Shanghai Stock Connect programme.This implementation of DLT could allow domestic custodians to host a local market infrastructure connectivity node for their clients, and possibly clients of their clients, as part of new DLT-enabled services. By connecting key stakeholders of a transaction, it can minimise reconciliation and work in duplicative operational activities to add to productivity gains. Similarly, with industry shared utility infrastructure such as trade matching and block trade processing, it should also enable participants to minimise technology investments. In such a model, the existing post-trade incumbents' roles may expand in the future.· Interoperable platformsThe third type of digital asset environment sees the traditional securities market infrastructure interfacing with fintech "pure plays" like DTCC-Paxos Settlement Services and Singapore Exchange with Capbridge. The interface would bridge the "traditional" securities market infrastructure regulated environment with the digital operating capabilities of the fintechs.In this case, the current incumbents' roles could evolve to use the fintech-traditional market infrastructure as an operational platform, shrinking their own infrastructure layers, and pursue other strategies like client experience, credit, liquidity, technology risks and market risks management services as differentiators to their clients. Over time, this route could lead to the formation of a new class of post-trade service providers for digital assets, in ways similar to how payment services fintechs like AliPay have risen to intermediate and process transaction flows.ConclusionThe different digital environment and operating models can influence the future roles of post-trade service providers. Other key external factors should also be holistically analysed: including regulations, clarity of legal relationships and liabilities that are necessary for concurrent communication, market acceptance of new ways of asset and investor protection and safety, market adoption and other innovations such as digital money for atomic settlement.Multi-nature cryptographic structures such as a "hash time-locked contract" that can function as an escrow, a DVP settlement method and as a Call option will also need to be addressed. The impact of digital assets and their environment on securities lending and other related capital market activities would also influence how a new securities post-trade market could unfold. In the future, incumbents will also need to recognise that not all roles may survive.So by mapping out the exact process flow changes, and more open industry discussions to identify the potential changes in each other's roles, incumbents can become better prepared for the future.The results would also determine if DLT would be able to modernise the existing securities post-trade industry structure, and to create new roles and opportunities for participants. Boon-Hiong Chan
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