The One-Stop Shop: How alternative asset clearing & settlements will work on the OpenFinance Network (OFN)

Our posts to date have largely dealt with the need for improved transparency, accessibility, and speed within the alternative asset clearing and settlements process. We’ve also presented our vision for how a blockchain technology-based solution, the OpenFinance Network (OFN), could help solve these inefficiencies. But how exactly do we propose the OFN will streamline the existing, age-old clearing and settlements process?

To understand the functionality and effectiveness of the OFN, it’s important to recap the three main components of an alternative asset trade.

1. Identity Verification: who are the buyers and sellers?
2. Asset Verification: what are the goods being exchanged?
3. Payment Verification: what is the agreed upon price and can each party hold up their end of the bargain?

Under the current life cycle of a securities transaction, these three components are addressed via a cumbersome, multi-phase, multi-party clearing and settlements process, as roughly outlined below:

1. Buyer or Seller: Trade is initiated as the broker sends the transaction to a trading exchange.

2. Trading exchange: Matches the transaction with the other party (counterparty).

3. Counterparty risk assessment: Risk is assessed after transaction is sent to brokers inside a Central Counterparty Clearinghouse (CCP).

4. Central Securities Depository: The initial party’s custodians — representatives who hold assets — work with the CSD to create a record of the transfer.

5. Registrar or Transfer Agent of Initial Trade: Is sent transaction data to update their shareholder list and information.

Of note in this model are the central roles that CSDs and CCPs play towards a functional, fluid market. These entities provide a coordination mechanism that is the foundation for the common framework utilized by all participants. The CSD serves as the “golden source” for shareholder ownership, while the CCPs reduce counterparty risk for buyers and sellers, keeping all participants honest and trusted.

The benefits of this model are evident: standardization of assets, interoperability between multiple participants, reduced counterparty risk, and ensured transactions verified by trusted sources. Or, to return to the language we used at the start of this section, all three necessary components of a trade have been addressed: the parties, the asset(s), and the payment.

There are detriments to this type of model however, including the massive scale needed to ensure the viability of the system (with a network of siloed, industry-owned trusted entities), the cost and difficulty for smaller players to gain access to this network, the redundant repeated data stored across multiple intermediaries and legacy systems that add complexity and inefficiency to the system.

OFN has been designed to remedy the inefficiencies of the current model while retaining the system’s existing benefits. It accomplishes this by stepping in to serve the central role currently played by the CCPs and CSDs in the ecosystem.

Let’s revisit the lifecycle of a securities transaction now utilizing the OFN:

1. Buyer or Seller: Trade is initiated as the broker sends the transaction to a trading exchange.
2. Trading exchange: Matches the transaction with the other party (counterparty).
3. Risk Assessment: OFN serves as the collaborative platform for conducting each phase of risk assessment during the trade:

a. Broker-dealer validators access the public registry of qualified entities and assets stored on the OFN (distributed ledger) to verify the identities of the parties involved. Validators can and may also grant additional authorization to deal participants at this time, including transfer agents, custodians, escrow agents, fund administrators and registered funding portals.

b. The assets involved in the trade are verified. Rather than relying on manually reconciled ledgers, participants on the marketplace can conduct real-time verifications of asset ownership and fund availability in order to eliminate counterparty risk.

c. The price and payment of the assets are verified. OFN’s distributed ledger acts as the “golden source” to synchronize (and protect) data across multiple stakeholders in standard securities transactions. This data is instantly available to all market participants and removes the single points of failure and fraud.

4. OFN Notification and Transfer: The buyer and seller (and their representatives) are notified that the trade is complete: payment made and asset ownership transferred.

5. OFN Writes Back: The transaction is processed, timestamped, and added to the chain of OFN transactions — a tamper-proof master history of alternative asset transactions.

While we’ve detailed out each step here in the process in a linear fashion, what’s equally important to understand about the flow and effectiveness of OFN is that it simultaneously acts as an identity verification for all agents and records all aspects of the transaction — including asset, price, location, date — in real time. The efficiency gains and transparency benefits versus the existing clearing & settlements framework are staggering.

###

Juan M. Hernandez is the Founder and CEO of OpenFinance Network, the trading platform for security tokens and other alternative assets. Juan is a serial entrepreneur, technologist, and polymath experienced in financial markets, exchanges, and blockchain technology. He holds a CS degree from Northwestern University and an MBA from the Kellogg Graduate School of Management.

If you enjoyed this post, please “clap” 50X in the bottom left corner so it will be shared with more people.