Investment Operations

DTCC Outlines Guiding Principles for Post-Trade Processing of Tokenized Securities

DTCC's Mark Wetjen

Paper identifies post-trade responsibilities that should be undertaken to establish confidence in security token platforms and protect market stability

The Depository Trust & Clearing Corporation today published a white paper that outlines function-based guiding principles for regulators and market participants for the post-trade processing of tokenized securities. The market for trading crypto assets that are security tokens where the post-trade processing uses distributed ledger technology (DLT), has created a need for safety, security and reliability around these transactions to protect market stability.

DTCC highlights that DLT introduces characteristics that are distinct from the market structure for traditional securities, therefore creating unique requirements in the design and application of appropriate regulations and post-trade processing structures.

Global standards that inform policy for traditional market infrastructures, such as the Principles for Financial Market Infrastructures (PFMIs*), can help guide stakeholders to define the types of responsibilities that might be applicable to a security token platform providing post-trade services.

In addition, DTCC identified several factors that could prove essential to the development of regulation and industry rules to govern the post-trade processing of security tokens or other crypto assets. For example, responsibilities for post-trade services should be promulgated in appropriate rules and regulations, assigned to an entity – regardless of whether it is vertically integrated with the trading platform – and appropriately enforced for a security token platform to operate in a manner consistent with the public interest.

“When most people think of markets and the trading of an asset, usually they are focused on what happens before or to the point of execution of a trade. But what occurs after a trade is executed is critically important and this issue has not been broadly discussed within the context of tokenized securities or crypto assets more generally”, said Mark Wetjen, Managing Director, Head of Global Public Policy, DTCC, and Chairman of the Board, DTCC Deriv/SERV LLC. “The framework DTCC has developed identifies the key issues that we believe need to be addressed by those seeking to establish policy, rules or best practices to govern the conduct of entities providing post-trade services for crypto transactions. In our view, these issues are fundamental to protecting investors and establishing trust in the safety and soundness of security token platforms,” explained Wetjen.

According to the white paper, “Guiding Principles for the Post-Trade Processing of Tokenized Securities”, the following responsibilities should be expected of any platform that provides post-trade processing of security tokens:

1. Demonstrable Legal Basis

A platform providing post-trade processing services for crypto assets should have a well-founded, clear, transparent and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.

2. Identifiable Governance Structure

A security token platform should have appropriate governance arrangements to support the operation of the platform. The governance structure should, at a minimum, include effective rules regarding functionality and risk management.

3. Identifiable Risk Management Procedures and Systems

No matter its structure, a security token platform should have a sound framework for comprehensively managing legal, credit, liquidity, operational and other risks.

4. Identifiable Procedures and Systems to Ensure Settlement Finality

Generally, a security token platform should be expected to provide clear and certain final settlement.

5. Security Token Issuance, Custody and Asset Servicing

A security token platform (or one or more of its components) should have appropriate rules and procedures in place to help ensure the integrity of securities or security token issues and minimize and manage the risks associated with the safekeeping and transfer of securities for which the platform is responsible. The security token platform should have robust accounting practices, safekeeping procedures and internal controls that fully protect assets for which the platform is responsible.

6. Resilience

At a minimum, the security token platform should be able to demonstrate that it can be operated safely, and that it has a high degree of resiliency and security.

7. Recordkeeping Requirements

The security token platform should demonstrate how it manages the privacy and confidentiality of appropriate records while maintaining their accessibility to regulators and appropriate third parties such as external auditors.