Alternative Global Financial Market Infrastructure


“Huston we have a problem”[1]. The original Apollo 13 phrase back in 1970, is applicable to the current in 2016. 

There are many commentators on the breath of the problems, but few practical solutions on the table; there are even people who believe the system is beyond fixing.

This post will limit the discussions to addressing the technical aspects of a replacement Financial Market Infrastructure, and leave the  “economic theory” an “politics” to others.

What is required?
It is pretty obvious that the technical infrastructure of the existing FMI is beyond repair, it has evolved over a number of years to the point where it is simply unstable. Major pieces of the infrastructure are starting to fail[2]. In many cases the defects are
Architectural and cannot be patched. Any system architect knows full well that KISS, always underpins any practical solution, and that legacy system migrations are both costly and high risk, especially systems such as the existing FMI. It is hard to completely identity, all elements, or risks of the existing global FMI.

Where to start?
One of the better documents in this space is the Bank of International Settlements (BIS) “Principles for Financial Market Infrastructure“. There is no reason why an  FMI should not meet the same principles, and applicable regulations as the existing  FMI.

So lets set these as the starting point for our replacement Financial Market Infrastructure and check any proposed solution against these principles. We will perform a review of the proposal solution, at the end of this post.

The Vision, is  a Continuous Global Market, which never closes?
The attention and responsiveness participants bring to the Market, joins them together across intuitions, space and time. All participants observe the Market continuously (without any interruption) with synchronicity and temporal immediacy. Everyone on the planet sees the same Market simultaneously and in real-time. A new  level of global integration, and interdependence will emerge, as temporal, systemic risk and significant “tied up” clearing capital within the existing market simply vanish, or gets redeployed in more productive venues.


The Key Design Principle

Simplify the existing highly complex systems and procedures,

while reducing

Systemic RISK.

The System Building Blocks

Secure Global Identity

A global secure Identity underpins all elements of the FMI, and is embedded into each of the FMI elements.

  • there is no centralized infrastructure or entity required
  • the secure identity is under the exclusive control of the Individual
  • can securely support the full range of Identity and authentication requirements

Identity Attributes:

  • Ownership can be digitally proven with high assurance, and possible non-repudiation
  • Disposable
  • Support digitally signed by owner
  • Third parties may offer digital attestations:
    • Identity Verification, Inc. digitally signs as passing their 100 points check.
    • Auction Provider, digitally signs as having a certain reputation score, on their website.
    • Decentralized market users, digitally sign one another’s attributes, building a decentralized reputation, social network. 
  • Full compliance with KYC, AML/CTP and cross boarder regulations
  • Needs to assist with financial inclusion, and remove the “unknown” within world population.

Global Payments Rail

Supports the global PVP unconditional settlements.

  1. Scalable, known risk solution
  2. Utilizes Secure Identity for entities
  3. High Assurance global P2P Payments Rail
  4. Supports Fiat Digital Currencies, as legal tender
  5. Provides “trust” between unknown and untrusted P2P entities
  6. Requires zero, payment specific hardware, or technologies
  7. Can be globally deployed without any barriers, technical, or regulatory
  8. Provides a “known level” of security, and hence risk
  9. Leverages existing commercial FIPS 140-2  certified  TPM’s, protection profiles and libraries
  10. Secure all existing ecommerce sites, with same trusted path assurance of all payment parties via HSM protected keys
  11. Provide a more secure, lower risk, solution than any existing hardware based payment solution, like ENV chip cards or ATM, and POS terminals
  12. Require zero shared secrets in any element which participates in the network.
  13. All payments are P2P occurring inside and between two FIPS-140-2 certified HSM’s;
  14. Mandatory security policy, which all parties, including all nodes hosts and processes must be mutually authenticated via hardware (HSM)  key pairs.
  15. All ownership of all payments are codified on a Public  Block Chain Ledger
  16. Needs to support financial inclusion, and remove the “unbanked” of the worlds population.

Global Asset Settlement Rail

Supports the global AVA and BIS DVP Model 1, unconditional settlements

  1. Scalable, known risk solution
  2. Global Asset Identifier which supports all existing  securities or assets without any central registration.
  3. Utilizes Secure Identity for entities
  4. High Assurance global P2P Settlements Rail
  5. Provides “trust” between unknown and untrusted P2P entities
  6. Leverages existing commercial FIPS 140-2  certified  TPM’s, protection profiles and libraries
  7. All asset transfers are P2P occurring inside and between two FIPS-140-2 certified HSM’s;
  8. All payments are P2P occurring inside and between two FIPS-140-2 certified HSM’s;
  9. Mandatory security policy, which all parties, including all nodes hosts and processes must be mutually authenticated via hardware (HSM)  key pairs.
  10. All ownership of all assets are codified on a Public Block Chain Ledger

Global Market Place

Essentially, the existing order, trade and execution, except that there is now full transparency via the Public Block Chain Order Book, and tightly integrated into the other FMI elements, this is essential for the overall FMI security and systemic risk. The main changes are identified below.

  1.  Global Asset Identifier which supports all existing  securities or assets without any central registration.
  2. Global Secure Identifiers
  3. All Market Orders available in real-time via Public Block Chain Order Book


Global Asset Registers
Support the legal codification of various forms of assets, examples are land, art, gold etc, which may be transacted as codified digital assets. 

  • All ownership of all assets are codified on a Public Block Chain Register

Done with the key Elements..

Ok so lets see how the above will meet the BIS principles

  • Settlement finality, done in real-time.
  • Money settlements, done via fiat legal tender
  • Physical deliveries, covers all digital assets, others TBD.
  • Central securities depositories, deprecated by P2P
  • Exchange-of-value settlement systems, all transfers are instantaneous and “atomic”
  • Participant-default rules and procedures, adapted to support the simpler solution
  • Segregation and portability, deprecated as all assets and currency directly held by P2P entities.
  • General business risk, no process change
  • Custody and investment risks, custody deprecated as all asset ownership codified on the Ledger, investment risk no change
  • Operational risk, no process change
  • Principles 18->23, no process change.
  • Disclosure of market data by trade repositories, all data is publicly available in real-time via the relevant Public Block Chains

What exists today?
The following is based on an existing commercial POC including all of the above elements and is available today. See Slideshow links below, for technical details of one such solution, we expect to see many more in the near future.

Market Trading, Order Book, Matching Engine and market data distribution. Matching engine lastency ~256ns.

DVP Model 1 Settlement,  continuous atomic P2P unconditional settlement ~ 50ms.

It is possible to provide a technical alternative to the existing FMI, in  a low risk, incremental manner, while meeting all of the regulatory and compliance requirements.

I keep seeing posts by regulators and incumbents who simply have not spend the time and effort to understand what modern technologies make possible, plus a lot of FUD from those who see their business disappear. It is time for everyone with their wide and varied perspectives to focus on the future which fixes the broken FMI as it exists in various stove pipes and national systems today, the alternative is an world where risk runs rampant. End soapbox.

The  most significant change is one of “mindset” within existing market participants, central  and regulators.  With  a level of understanding of the alternative FMI, a number of the current issues identified such as Basel III, Ring Fencing, and other organizations, can be more readily addressed.

The key is a fully integrated, holistic solution, for an alternative  Global Financial Management Infrastructure, which can be incrementally deployed within an alternative “green field” solution space.

The Road to 2020
Ok, so we have solved the bits, but this is only a small part of replacing an existing “regulated” and typically entrenched monopolies or oligopolies.  High risk and significant capital requirements are useful barriers to entry, within distorted markets caused by misguided “regulation”.

Lets look at one perspective of a commercial pathway, to achieving a fully functional  Global Financial Market Infrastructure by 2020.

2016: Regulation.

Its a commercial reality, that to achieve a 2020 objective, any solution MUST fit inside the existing legal, regulatory and compliance framework as it exists today. Experience has shown it will take at least a decade to effect any change, so no point. While most of the issues are simply mind sets, this will take at least a year to adapt the technologies to the various global jurisdictions. The road map envisions a limited set of use cases being taken though the process during 2016.

Global Secure Identity system and  infrastructure fully operational.

2017: Addressing the Payments Rail, this is the year for getting the Payments side of the DVP Model 1 settlement sorted. The CCP is no longer involved in the payment settlement the objective solution is fiat “legal tender” but with the ability to provide cross ledger “atomic” transfers with the Asset Rail. This year will see the very first “Market Place” with fully integrated trade and settlement, on  a limited set of securities and orchestrations.

2018: The establishment of a alternative Global Market Place, with a limited set of assets. The market place operates with zero closing times and on a continuous trading and settlement basis.  The first truly low risk global FMI operating P2P BIS DVP Model 1 unconditional settlements.

2019: The “migration” from the high cost, high risk legacy system to the new Market Place. The migration will be driven by “clients” or buy side institutions, not regulators or regulated market participants.

2020: The volume of trades executed and settled on the Global Market Place, exceeds the legacy systems, which are now becoming uneconomical to operate. The legacy systems rapidly deprecate, from this point onwards, as they cannot compete. People are voting with their feet.

One last observation, simply because the business of existing players has become extinct, does not mean there is a regulatory failure!

Lets take a look at what this all means to the existing parties.
Based upon the experience with the Global Market, Payment and Settlement Rails, the following is the my view of the future:

Brokers these disappear, replaced by accounts held directly with Market Participants.

Exchanges these remain, and typically will provide the FMI to their participants.

Clearing Participants gone..

Settlement Participants, remain and become the only operational element of the CCP. Payment settlement done via Bank FMI, no need for banking licence or central bank RTGS.

Central counterparty (CCP), operational functions are deprecated, same with the major part of the capital requirements and liquidity as P2P DVP Model 1, has zero counterparty risk, and zero liquidity requirements., and there is no clearing function. The CCP provides the regulatory and licensing to the Settlement Participants.

Central securities depository (CSD), gone. All assets held in high assurance HSM’s directly by the client.

Custodians  gone, all codified assets held directly

Registry gone, but functions performed directly by issuer. All ownership, holdings, distributions and notifications are now in real-time on the Block Chain.

Market Makers as P2P promotes buy-side liquidity over traditional market markers, liquidity is not likely to be an issue; but jury is out.

Market Data Providers as the Order Book and the Trades are all on the Public Block Chain, these providers have no function, these ledgers also provide full market transparency on a level playing field.

Banks, not required as all fiat Digital Currency, held directly by client within the bank provided FMI. Like the CSD no bank can be involved within any high assurance P2P exchange. Banks will become the suppliers of technology ~  to old world “bank vaults”, the FMI infrastructure.

Central Banks the jury is out, one view is that Central Banks will  connect directly to customers via fiat Digital Currency, no need “helicopter money” simply inject directly into the economy? The alternative view is as most of the “money” is actually created to day by commercial banks, they could simply form a consortia, and make central banks obsolete? Technology today, can support both view, only time and the market will tell.

SWIFT, gone as security moved to HSM secured application datagrams over commodity Internet or 40Gb market networks.

True change is driven by Empowered Individuals,
not regulation or incumbents.


Q: We need a CCP with novation and netting to manage risk?

A: One needs to think about what a continuous market, where trade and settlement happens in less than 50ms actually looks like. 

Typically this question is predicated on the systemic risk that sits in the delay pools, there is a wad of theory on why Model 3 can have some advantages over model 1 settlement ( mostly when true DVP is not possible), the second driver is the obsolete transactional engines, in the back office world.   Today any exchange worth its salt, can match and execute a trade in around  256ns, the same technologies applied to a similar architecture, supports a P2P DVP Model 1 unconditional settlement in ~ 50ms today, in fact settlements can actually happen in ~ 1ms in several use cases. This produces the lowest possible systemic risk as the latencies of the trade and settlement are now compatible. Both of these deprecate the existing Model 3 novation and netting approach.

Quite simply continuous P2P BIS DVP Model 1 unconditional settlement in ~ 50ms is the lowest possible systemic risk solution.  Plus there is now zero counterparty and liquidity risk as the settlement is instantaneous and “atomic”. 

Q; One needs  real-time payments system

A: Correct, the latency of the payment system must match the latency of the asset transfer to ensure atomic transfer of asset with payment a s required by BIS DVP Model 1 gross settlement.

Q: Traders need to have the payment sitting in their account to trade.

A: Correct, with continuous trade and settlement occurring in ~ 50ms, anyone entering a market trade must have the capability to actually make payment. A Global Block Chain Ledger Payment Rail underpins the settlement process, within our POC the trade execution is the place where this check is performed. The days of individuals, institutions and HTF traders playing with almost zero risk in “delay pools” are over. These types of trades will now have the market allocate the correct risk to these activities, they will operate inside the market not on the outer. 

Q: Market models currently go to great length to anonymise participants at different points in the transaction lifecycle.
A: The days of market manipulation by large institutions are also over, the market now has full transparency to all market participants on a real-time and equal basis, this is what a perfect market requires. If an institutions wants to make a large trade, then this will be appropriately priced by the market, as it should be. 

Q: Fat fingers

A: Yet mistakes and failures  will have a cost, as they must. All such corrections will now be on market as they must be.

Q: Naked short selling in the new FMI?

A; Simply cannot exist,  this a variant of the payment side Q above.

Q: Meeting new regulatory requirements on capital and transparency

A; Enter a new world, where everyone has full transparency in real-time not just regulators, this is provided as zero system cost, as it is a fundermatal aspect of the new FMI.  It will be interesting to see what happens with true market transparency is provided.

Q: Are smart contracts needed in the FMI.

A: In short no, the existing orchestrations are well known, nothing new is required in this space, a ledger has been doing this for 50 years, and will continue to meet these requirements. Its just a Ledger..

Q: What would FX trading and Liqudity look like?
A: Most FX trades are OTC, and based on a “quote” driven market, the has proven to produce an unfair market, where nabks can easly distort the FX prices. We expect that FX will move to an order book, with P2P market trades ebign the norm. The existing market makers being primarly replaced by “Buy” side liquidity.  The net result will be FX becoming just another tarde, and brough into a “fair” market. This should initially see rates in the 0.09% to 0.29% range.

Further Reading
Securities Clearing, and the Dodo Bird..

The Holy Grail of Settlement
The Global Block Chain Payments Rail 

Regulation and the Block Chain Ledger
Your Identity is yours and yours alone.

Slide Share

The Global Block Chain Payment Rail

The Global Block Chain Securities Settlement Rail


1. “Originally a genuine report of a life-threatening fault.”


3. Updated 11 December 2015
Contagion in Payment and Settlement Systems 


 [linkedinbadge URL=”” connections=”off” mode=”icon” liname=””] is Managing Director, System Architect | Technology Strategist | Business Analyst, and this article was originally published on linkedin.