A Blockchain Implementation Equity Marketplace A Blockchain Implementation

About us I am Tullio Menga, ICT architect and developer. I have been working in Capital Market area during last twenty years, specifically in the field of high performance infrastructures. I am currently collaborating with ATS, Milano (IT), having its core business in Capital Market. ATS is Innovation Partner of UCL. We are currently exploring use cases of blockchain technology in OTC derivatives, non-listed equities and several other areas.

DISTRIBUTED TRANSACTION Blockchain in brief SECURITY NEAR-REAL-TIME immutable, non-tamperable transactions cryptographic encryption consensus transactions are etched to the ledger as they are processed no need for end-of-day batch processes IMMUTABLE DISTRIBUTED TRANSACTION LEDGER REDUDANCY PROCESS OPTIMIZATION decentralisation data replication on nodes no single point of failure smart contracts to define complex business logics complex transactions execute atomically

FINANCIAL INSTITUTIONS Blockchain in Capital Market t+0 t+0 t+y t+x TODAY Several back-offices use different technologies and interact at different times, leading to very complex, slow and non-atomic transactions, possible human errors and slow reaction to failures. FUTURE Distributed ledgers handle complex transactions atomically, in near-real-time, and share updates at transaction time, leading to safer and faster processes, less human errors and quicker reaction to failures. FINANCIAL INSTITUTIONS REGULATORS Intracompany settlement Loan settlement Trade settlement Trading Collateral management Derivatives clearing Derivatives agreements Cross-border payments Trade reporting Compliance reporting Risk visualisation Transparency regulation Anti-money-laundring

OTC Derivatives and Equities   OTC Derivative Trading NON-listed EQUITY Trading Market Engine (book, matching) X Post-trade settlement Contract issuing (master agreement) Contract maturity settlement Shares management Collateral management Instrument pricing Margination management Trade-offs Requires more features and more complex More problematic normative aspects (may involve CCP obligations) Requires less features Easier normative aspects (no CCP obligations)   OTC Derivative Trading NON-listed EQUITY Trading Market Engine (book, matching) X Post-trade settlement Contract issuing (master agreement) Contract maturity settlement Shares management Collateral management Instrument pricing Margination management focus of this presentation

Why a blockchain? LEGAL PROCESS TECHNICAL Immutable Transaction Ledger Ownership Provides a reliable register of asset property exchanges Compliance Provides access to auditable data, verified and hard to tamper No Central Counterparty Distributed ledger eliminates need of third-parties such as a CCP, and risk from single point of failure Many Processes implemented on same Assets 1 transaction – many assets Transactions involving many assets, such as ollaterals can be implemented ‘atomically’. 1 asset – many transactions Different transactions involving the same asset, such as trading equity shares and using them for collateral allocation, can be implemented ‘atomically’. Technical benefits Several participants perform better Consensus is more reliable when the number of particdipants increase, without significantly loosing performance. Near-real-time transactions Can make settlement faster, reducing the need of separate batch accounting processes.

Equity Trading Processes CASH LEDGER SECURITY LEDGER COLLATERAL LEDGER asset: currency transactions: amount transfers actor: financial institutions asset: equity shares transactions: ownership exchanges actor: custodians asset: collaterals transactions: collateral allocations actor: central counterparties blockchain pegging

Equity Trading Ledger EQUITY TRADING LEDGER assets: currency and equity shares transactions: trades and collateral allocations smart contracts: custodian and central counterparty business logics actors: financial institutions only

OTC Derivatives and Equities   Private – Permissioned Public – Permissionless Participants Controlled, trusted. Free, trustless. Potential market liquidity Controlled by participants. All the circulating crypto-currency. Performance (current) Higher (1 block <3s). Low (1 block in minutes). Security Same as any common private network. Relies on anonymous accounts, must be analysed in details. Ledger permissioning Embedded, rules defined by stakeholders. Harder to control (participants can be anonymous). Regulator / normative implications Rules can be defined to meet regulatory compliance. Regulatory institutions can be participants themselves Harder to meet regulator compliance requirements (it is a natively cross-border platform). Trade-offs greater performance finer permissioning control more normative-oriented (CSDs plays a role) more normative oriented consensus basis must be built greater potential penetration greater consensus basis slow performance hardly controlled permissioning harder to meet compliance rules (no CSDs) public code, easier hacker attacks   Private – Permissioned Public – Permissionless Participants Controlled, trusted. Free, trustless. Potential market liquidity Controlled by participants. All the circulating crypto-currency. Performance (current) Higher (1 block <3s). Low (1 block in minutes). Security Same as any common private network. Relies on anonymous accounts, must be analysed in details. Ledger permissioning Embedded, rules defined by stakeholders. Harder to control (participants can be anonymous). Regulator / normative implications Rules can be defined to meet regulatory compliance. Regulatory institutions can be participants themselves Harder to meet regulator compliance requirements (it is a natively cross-border platform). Our choice

Today Ⓒ2014 ATS

Our Model – who does what are the user participants of the platform do trading transactions do collateral allocation transactions manage updating of balances on real-world bank accounts Financial Institutions are the owner participants of the platform are responsible for normative compliance read security ownership exchanges manage updating of their security accounts CSD(s) Bank Accounts Security Accounts Interested in information from the ledger In practice, may receive red information from participants ideally, can be participants with read-only access to the ledger Regulator implement the market engine business logic of CSDs, ‘atomically’ to trading transactions business logic of CCPs, ‘atomically’ to collateral allocation transactions Smart Contracts

Participation model – the actors Participant Institutions Country CSD node node API broker Retail Users Professional Traders broker node Associated Institutions Regulators

Participation model – the actors Participant Institutions Country CSD Participant pays transaction fees (own or Trader’s) to the Platform Platform forwards part of collected transaction fees to each Participant Trader pays transaction fees CSD receives part of transaction fees collected by the Platform Participant forwards part of the fee to the platform Retail Users Professional Traders Associated pays own transaction fees to the Platform Associated Institutions Regulators

Tomorrow Ⓒ2014 ATS

Single Country Country A

Multi Country Country A Country B

Multi Currency Country A Country B Country C Currency 1 Currency 2

Road map Ⓒ2014 ATS

PARTICIPANT INSTITUTIONS Road map MARKET ENGINE Developed Performance-tested (>100 transactions/s on 10 nodes) WHITE PAPER Will be released on October 1st 2016 FULL IMPLEMENTATION Will be released on November 1st 2016 Using Intelledger®, part of Hyperledger project of Linux Foudation PARTICIPANT INSTITUTIONS Currently building network Involving Banks, Brokers, Institutions

Thank you tullio.menga@atscom.it www.atscom.it Ⓒ2014 ATS