Project Jasper Phase 3: Application of Distributed Ledger Technology to Securities Settlement
Distributed ledger technology (“DLT”) has the potential to transform the financial industry. Worldwide, 70% of capital markets information technology providers surveyed have plans to develop and use DLT projects to assist with trading, according to a Nasdaq and Celent study. Project Jasper, launched in 2015, is one such experiment among Payments Canada, the Bank of Canada, TMX Group, Accenture and R3. Project Jasper aims to provide an understanding of whether and how DLT can “transform the future of payments in Canada,” according to the white paper published in September 2017 (the “White Paper”), which we discussed in our previous article.
Project Jasper has taken strides towards testing DLT’s use to lower costs and improve efficiency in the context of securities settlement, as discussed in an October 2018 report summarizing the results of Jasper Phase 3 (the “Phase 3 Report”). However, the Phase 3 Report concludes that while DLT shows promise, in order to see significant efficiency and material cost benefits over the current system, the scope of the project would need to be increased even more – possibly including the use of smart contracts in settlement negotiations, additional assets in the settlement process, and additional participants.
This post summarizes the background of Project Jasper, how the technology in Phase 3 works, and some of our observations of the key benefits and opportunities for growth based on the Phase 3 Report.
What is Project Jasper?
Jasper Phases 1 and 2: A Focus on Wholesale Interbank Payment Settlements
Project Jasper has had three phases to date. As noted in the White Paper, Phases 1 and 2 focused on wholesale payments clearing and settlement for domestic high-value interbank payments. DLT matured between Phases 1 and 2, making it more easily scalable and more attuned to privacy and confidentiality objectives. However, Phase 2 also showed that DLT did not seem to have significant cost-savings or efficiency improvements compared to the current payment exchange on Payments Canada’s Large Value Transfer Systems (“LVTS”). Further, Phase 2 concluded that expanding the scope of the DLT system to include the settlement of multiple assets could bring material benefits.
Jasper Phase 3 – An Expanded Scope to Include Securities Settlement
Building on the previous two phases, Jasper Phase 3, which launched in March 2016, introduced more complexity and expanded the project’s scope beyond wholesale payments to include securities settlement for TSX-listed equities. In Jasper Phase 3, the Project Jasper team focused on leveraging DLT to bring together securities and cash ledgers for CDSX (Canada’s clearing and settlement system for securities) and participants in LVTS to facilitate daily consolidated cash reporting and Canadian-dollar settlement of CDSX obligations.
Jasper Phase 3: The Technology and Its Application to the Securities Settlement Process
According to the Phase 3 Report, the Jasper Phase 3 proof-of-concept (“POC”) solution used a peer-to-peer network, developed on the open-source Corda platform, over an eight-week period. The peer-to-peer network involved the following six participants, each of which was allocated a separate node on Corda:
• CDS (which tokenizes equities and acts as a centralized counterparty)
• Dealers (participate in settlement transactions)
• Bank of Canada (tokenizes cash)
• LVTS member (extends credit to non-LVTS members)
• Payments Canada (observes cash transactions)
• Notary (provide a uniqueness consensus)
Leveraging DLT, the POC gave participants the ability to settle net securities position using a single atomic transaction (i.e. a transaction that either succeeds fully or fails fully) on the shared ledger, which took, as inputs, “the [securities] position to be settled as well as the cash and equity tokens required to settle it. If successful, [the transaction] consumes the inputs, marking them as no longer valid. It also produces new cash and equity tokens as defined by the position. If it fails, all inputs remain valid, and no outputs are produced.” Consequently, the POC accounts for the necessary actions that each participant must take to complete the transaction, resulting in an “immediate and final exchange of equity and cash for the given position”.
Key Benefits Observed
- Technical efficiencies. A shared ledger centralizes information so there is no need to replicate data. The tokenization of cash and equities enables direct access to assets by any participant.
- “Loose coupling”. Corda DLT enables “loose coupling” of LVTS and CDS which ensures that each authority maintains control over its own system and assets.
- Cash efficiencies. The POC simultaneously consolidates and optimizes collateral requirements between large-value interbank payments and securities settlement systems. It lets parties see all of their cash and collateral in one place.
- Private ledger. Jasper Phase 3 maintains privacy for market participants and their transactions by ensuring that only the parties involved have the ability to view the transaction history.
- Confidentiality. If cash or equity token outputs can be reused in subsequent transactions, the eventual recipient would need to verify that the tokens were originally issued by the authorized issuer and are a valid descendant. Corda can provide the full transaction lineage, which would cause confidentiality concerns. To limit such concerns, Corda provides “confidential identities” – secure and verifiable one-time pseudonyms.
Room for Improvement
- There was no real evidence of material cost savings. The POC was limited only to the settlement of exchange-traded equities after novation and netting by CDS, so participants could not reduce back-office reconciliation efforts. The report concludes that in order to realize more gains, the scope of the project would have to be increased further to include more aspects of the full post-trade clearing and settlement process and other types of equities activities that affect securities positions, like derivatives trades and securities lending.
- Regulatory and legal challenges. In a recent article in the Financial Times, a representative of Payments Canada highlighted the regulatory and legal challenges associated with the implementation of DLT technology as part of Jasper Phase 3, pointing to the issue of dealers’ access to digital cash despite current laws and regulations that restrict dealers from accessing central bank funds. Accordingly, one of the conclusions of the POC was that the current legal and regulatory landscape will likely need to adapt in order to respond to and facilitate DLT’s potential transformation of the financial industry.
Project Jasper is an impressive example of collaboration between the public and private sectors to explore the potential impact of DLT on the financial industry. As Phase 3 has shown, DLT can be used effectively to settle cash and equities. The Phase 3 Report suggests that in order to see significant cost savings and efficiency gains over the current system, the scope of the project and the number of participants would need to be increased further. In addition, regulatory challenges remain. In particular, if Project Jasper is expanded to include additional trade and post-trade aspects of a transaction, additional regulatory issues will need to be considered, such as regulations on securities and derivatives, trade compliance, data and privacy, and financial crime and anti-money laundering. Laws and regulations in these areas are premised on traditional systems that may ultimately need to be modified to respond to and account for the potential use of DLT.
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