Equities Business Overview

PRESENTATION TO
HYPERLEDGER CAPITAL MARKETS SIG
JUNE 17 TH 2020

Presented by:
Junji Katto
Sateesh Vidhyanadhan

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 Agenda
1. Holistic View of Capital Markets
2. What are equities
3. Equities Trade Lifecycle
4. Current Equities Trading and Settlement Process
5. Challenges in Capital Markets
6. Key problems to solve
7. Blockchain Potential Benefits
8. Sample implementations

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 Holistic view of Capital Markets
A capital market is a financial market in which long-term debt or equity-backed securities are bought and sold.
Capital market refers to a broad spectrum of tradeable assets that includes the stock market as well as other venues for trading different financial products. The stock market allows
investors and banking institutions to trade stocks, either publicly or privately. Stocks are financial instruments that represent partial ownership of a company. These documents are used
extensively by companies as a means of raising capital. Within the stock market itself are primary and secondary markets that trade among banks underwriting stock and public investors
trading stock, respectively.
The Sales & Trading Division of the Investment Bank connects
Investment Banks are intermediaries between
buyers and sellers of stocks, bonds, commodities and other
the providers of funding (investors-in the form of
assets. Salespeople and traders sit on a trading floor.
both debt and equities investors) and the users
The trading floor is split out by asset class. Any large
of funding (corporates, financial institutions,
investment banks has following roles
hedge funds, supranational, municipals and
Front office Sales & Trading :
governments). When talking about investment
1. Sales Traders – Client orders and contract management
banking, it is important to know the difference
2. Traders – Pricing, Trade executions and Trade Entry
between the buy-side and the sell-side. These
3. Structuring – Complex Strategies and Product Types
two sides make up the full picture, the ins and
4. Research - analyze market data and trade ideas.
outs of the financial market, and both are
5. Quant/Strat - backtest trade ideas, build pricers, maintain
indispensable to each other:
electronic trading or algorithmic trading platforms.
 Sell-Side – is the side of the financial market,
Middle office:
which deals with the creation/issue,
1. Risk management - credit, margin, and market risk
promotion, and selling of traded securities to
2. Trade Governance - validation, enrichment and novation
the public.
3. Product controls-performance, advising, MI,P&L Attribution
 Buy-Side – is the other side of the financial
4. GRC - legal, compliance and regulatory reporting.
market that buys and invests large portions of
5. Treasury Management - capital, funding and liquidity risk.
securities for the purpose of money or fund
Back office:
management. The Buy Side refers to those
1. IT and Trade support
firms that purchase securities and includes
2. Trade confirmations/allocations
investment managers, pension funds, and
3. Collateral Management
hedge funds.
4. Accounting Settlements –delivery, receipt, payment
5. Reconciliations
Investments banks also tend to be heavily
6. Custodian – safekeeping of investors’ securities
involved in advising corporate clients on their
Enhanced from “buy side vs Sell Side - wallstreetprep.com 7. Clearing
activities, particularly in merger and acquisitions
https://s3.amazonaws.com/wsp-media-library/finance-careers-overview.png
(M&A) https://www.wallstreetprep.com/knowledge/the-ultimate-guide-to-sales-and-trading/
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 Holistic view of Capital Markets (conti.)
Products in Sales & Trading -Markets products are broadly classified as
Investment Banking and Securities Trading Equities
Refers to trading stock. More specifically, equities are split up between:
Corporate Finance Capital Markets • Cash equities: Trading ordinary shares of stock
• Equity derivatives: Trading derivatives of equities (stock options) and equity indices – ETF
Investment Banking Coverage Products
Coverage Fixed Income -Refers to bonds, and are often further split up in the following way:
and Advisory Institutional Clients • Bond: Government/Treasury, Municipals: Tax-exempt bonds (State, Municipality, Non-Profit), EM
Equities
Group Bonds, Supranational agencies etc.
Research – Fundamental Prime Finance, Securities • Rates: Macro-economic focused Interest Rate Derivatives. Focused on the yield curve, inflation..
Global Capital Issuance
Analysis Lending and Custodian Bank • Credit: Corporate Bonds (High Grade, High Yield, Loans), Credit Derivatives – CDS, CDO, iTraxx etc.
(incl, Markets clearing)
• Securitized Products: Mortgage Backed Securities, Asset Backed Securities
Structuring Markets Electronic Currencies - Also referred to as FX - and Commodities rounds out FICC.
Trading
Credit Portfolio Strategies
Money Markets – Warrants, CD, Loans & Deposits etc
Listed Derivativities –
Futures & Options Desk Types of trading
Flow Trading - Trader acts as principal, market making directly and not through exchange. The client decides
OTC Derivatives
if they want to buy or sell, and the trader sets the price and takes the other side, charging a bid-offer spread
on the transaction. Used for Fixed Income and most equity derivatives.
Foreign Exchanges
Agency Trading - IB sends client order to exchange on behalf of clients. Action on behalf of clients.
Fixed Income Investment bank takes no risk in agency trades, traders earn only a small commission when they act as agent.
Sovereign Bonds Mostly Stocks (cash equities), futures and certain derivatives.
Interest Rates Prop Trading -Proprietary trading refers to a banks invests firm money for direct market gain, rather than
earning commission dollars by trading on behalf of clients. Banks take direct risk with their own capital.
Credit – Corp Bond & Electronic Trading – also called platform or algorithmic trading, is all about removing human touch points
Macro Derivatives from the trading process. e.g. ATS, ECN, DMA, Dark Pool, Single Dealer, Exchanges(RM), Broker venues, etc.
Commodities Interdealer Brokers (IDB) or Voice Brokers - With no central exchange for some OTC and wholesale
secondary markets, financial institutions need to find a way to find information, liquidity and anonymity for
Money Markets – Loans
their trading activities. IDB has specialist, up to the minute market knowledge, they can offer colour to the
& Deposits
dealer at any time. IDB provide anonymity to client traders. IDB broker provides potential buyers and sellers a
Emerging Markets Desk MTF/OTF venue with the necessary information they need to execute their trades.
Today, most traders are Flow Traders, with Prop Trading being regulated
Global Liquidity
out and many Agency Trading roles being replaced by Electronic Trading.
Management
Only Algo and Hedge funds run prop trading desks.
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 What are Equities
Equities or commonly known as stocks are instruments that signifies an ownership position in a corporation, and represents a claim on its proportional share in the corporation’s assets and
profits. Ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding.
Types of Cash Products Types of Derivative Products
Common stocks Index Options
- Also called “Ordinary Shares” - An Option is a contract that gives one party (the option holder) the
- Indexes are a portfolio of securities representing a particular
- Still represents ownership in a corporation right, but not the obligation, to perform a specified transaction with
markets or a portion of it
- Exercise control by election a board of directors another party (the option writer) according to specified terms.
- Each index has its own calculations methodology and is
and voting on corporate policy - Special instrument that covers the right, but not the obligation to
usually expressed in terms of a change from a base value
- Last priority in liquidation engage in a future transaction on some underlying security, or in a
- The percentage change is more important than the actual
future contract.
Preferred stocks change in value
Parties in Option
- Class of ownership in corporation that has a ETF 1. Option Buyer: Enjoys the right to exercise and the right not to
higher claim on the assets and earning than exercise the options; pays the option premium
- Is a security that tracks an index, a commodity or basket of
common stock 2. Option Seller (Writer): Has the obligation to deal at the
assets like an index fund but trades like a stock on an
- Do not have voting rights contracted strike price if the buyer will not exercise the option;
exchange
- Higher priority in liquidation than common receive the premium.
*Disclaimer: From the purpose of this presentation, we will
stocks Types of Options
simplify and assume that the ETF(s) concerned are booked as
American Depositary Receipt stock 1. Call Option
- ADR are negotiable certificate issued by a US 2. Put Option
bank representing a specific number of shares of Futures & Forwards Types of Option based on Exercise date
a foreign stock traded on a US stock exchange. - Futures and Forwards obligate the holder to buy the said 1. American - exercisable at any time during the option period.
- ADRs make it easier for Americans to invest in contract in a future date. 2. European - exercisable only at expiry date.
foreign companies, due to dollar denominated - Futures contract are standardized instruments that trade on 3. Bermudan - exercisable at pre-defined dates within the option
price, lower transaction cost and timely dividend an exchange, have proper secondary and are guaranteed period.
against credit default by means of a daily settling of gains and
distributions
losses.
Warrant
Global Depository Receipt - Forwards are OTC products - A derivative security that gives the holders the right to
purchase securities, usually equity from issuer at the
- Specific number of share certificate held in Futures Margin (daily netting) specific price within a time frame
the bank of one country of a stock traded on
- In trading futures, margins are required, which acts like a
another country exchange
performance bond or down payment. The original deposit is
Others - Synthetic equities, convertibles bonds, Sec
- Also called European Depository Receipt lending, Exotics, Strategies etc.
called initial margin and lowest amount the account can
reach before it gets pulled is called maintenance margin.
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Issues
Equities Trade Lifecycle
• Rising cost pressures from manual processes and legacy technology infrastructure, multiple intermediaries, unnecessary data reconciliations, and complex layer of handoffs
within the ecosystem.
• Increased regulatory pressures, including the use of more central counterparties for clearing and settlement, reporting requirements, and higher capital buffer requirements.
• The proliferation of data available across multiple platforms but few programs in place to harness its potential and use its knowledge to better serve clients.
Opportunity
1. Industry standards to facilitate the adoption and migration to sustainable digitization
2. Technology to support new digital business models and processes.
3. Common domain model (CDM) - CDM is meant to be technology agnostic yet at the same time can be leveraged with emerging technologies, such as smart contracts and
distributed ledger technologies (DLTs).
4. With the advent of blockchain and smart contracts, the inefficiencies and costs in derivatives trading due to multiple handoffs and complex processes were supposed to
decrease.

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 Equities Trade Lifecycle
Trade Life Cycle – equities secondary market – Pre-trade, Order placement, Order Management (High touch vs Low
Touch), Order execution (Exchange x OTC), Confirmation, Reconciliation, Allocation

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Equities Trade Lifecycle

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Equities Trade Lifecycle

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 Equities Trade Lifecycle

Source: https://www.slideshare.net/aiQUANT/fix-protocol-overview-1697394

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 Equities Trade Lifecycle

Source: https://www.b2bits.com/about/success-stories/smart-order-router- Source: https://www.slideshare.net/aiQUANT/fix-protocol-

system-for-dash-financial overview-1697394

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Equities Trade Lifecycle

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The distribution of liquidity in the US market

Source: Nasdaq Economic Research, SIP data, FINRA ATS data (for Oct-Nov 2018) -
https://www.nasdaq.com/articles/slicing-the-liquidity-pie-2019-02-11

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Current Equities Clearing and Settlement

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 Challenges in Capital Markets
 Challenges in Capital Markets – Transparency (e.g. reporting, execution indicators), operations efficiency (e.g. reconciliation), risk management (…), liquidity, AML, surveillance (record
keeping, trade reconstruction)
 Common domain model (CDM) - Common standards for data formats, reference data, transactional data, and business processes. CDM is meant to be technology agnostic yet at the
same time can be leveraged with emerging technologies, such as smart contracts and distributed ledger technologies (DLTs).
1. A consistent model that defines all lifecycle events and processes for
traded products can position firms to achieve simplification and scale
in post-trade while preserving freedom of technology choices and
interoperability between technology solutions.

2. With the advent of blockchain and smart contracts, the inefficiencies

and costs in derivatives trading due to multiple handoffs and complex
processes were supposed to decrease. However, before banks and
industry participants can rely on any distributed ledger as the new
holy grail or “single source of truth,” better standardization is required.
Most participants today use a complex set of processes, data
structures, and reporting formats to track trade lifecycles in order to
satisfy internal and external regulatory and compliance norms. Thus,
without a common language or format, it may not make sense to
adopt a common ledger.

3. The market ecosystem faces challenges from a sub-scale post-trade

infrastructure marred by inadequate risk controls. Traditional cost-
saving opportunities have already been fully explored, and new
solutions don’t effectively address the end-to-end process. Current
pain points will likely magnify over time, increasing stress on
operational processes and risk management, as well as leading to the
need to retrofit innovative financial technology solutions with inherent
workarounds. A standard blueprint for the entire post-trade can
significantly reduce inefficiencies. However, real digital transformation
is only possible through common underlying standards.

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Key problems to solve

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Blockchain Potential Benefits

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Blockchain Potential Benefits

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Blockchain benefits for Equities Clearing and Settlement

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Equities Clearing and Settlement

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 AML, FinCrime, Surveillance & Regulatory Compliance
Next generation compliance solutions can be designed to protect financial institutions from financial and reputational harm. We can provide tailored our solution to fit to your specific
needs. We offer fully integrated, customisable AML and trade surveillance solution based on next generation AI machine learning algorithms.

AML SOLUTIONS: TRADE SURVEILLANCE:

 CLIENT ONBOARDING  ENSURE THE FIRM IDENTIFY POTENTIAL MARKETS VIOLATIONS
 CUSTOMER DUE DILIGENCE (CDD) SUCH AS INSIDER TRADING OR ROUGE TRADING
 KNOW YOUR CUSTOMER (KYC)  MONITORS USING RELATIONSHIP GRAPH
 SANCTIONS AND PEP SCREENING  AI/ML CLUSTERING AND SCORING ALGORITHM TO VERIFY
 TRANSACTION FILTERING ABNORMAL ACTIVITIES
 REGULATORY REPORTING  FULLY TRANSPARENT CASE MANAGEMENT
 ALERT CASE MANAGEMENT  AI/ML BASED ALERT SCENARIOS
 AI/ML BASED FRAUD DETECTION AND PREVENTIONS

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Blockchain Potential Benefits

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DLT - Primary Market – IPO / Roadshow

An initial public offering (IPO) seems to be the de facto goal of many startup companies.
Founders, investors, and public observers often wonder, “When will this company IPO?”,
“What will this company’s stock price be when they eventually IPO?”, and “Why hasn’t this
company completed an IPO yet?” You may have been asked some of these questions about
your own company. While an IPO is a worthy objective with many potential benefits, there
are also many risks and disadvantages associated with going public, and thus, an IPO may
not be suitable for every company.

 Industry 5.0 has revolutionised how digital transformation can be delivered. IPO process
are still very cumbersome and paper based.

 Companies incur huge transaction cost during the IPO issuance process

 Additional Regulatory Requirements And Disclosures

 Market Pressures

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 Blockchain Potential Benefits

• Vanguard - a synchronized database for mutual fund indexes that is • HQLAᵡ - seamlessly execute capital-efficient securities lending
constantly updated every time CRSP makes a change to the index transactions for enhanced balance sheet optimization and
• https://www.forbes.com/sites/jeffkauflin/2019/05/30/vanguard-is-now- mobilize collateral across a fragmented custody ecosystem; this
using-blockchain-technology-to-help-manage-13-trillion-in-index- is done without moving the collateral from one location to
funds/#1244abc28dfe another.
• • https://www.hqla-x.com/

Riskless Trading - effectively guarantees that every matched order • Shortening settlement times - Project Ion aims to shorten the
(execution) is settled. Riskless trading is made possible through settlement cycle for the DTCC’s core settlement systems
atomic settlement on the SDX • https://www.ledgerinsights.com/dtcc-blockchain-tokenize-private-securities-public-
ethereum/
systemhttps://www.sdx.com/en/home/sdx/business-model.html
• Tokenizing private securities - Project Whitney is the edgier of
• A ‘Smart’ Approach to Blockchain for Collateral Management: the two proposals and aims to tokenize private securities and
Bringing Banks and Blockchain Together enable secondary trading. This would initially target Regulation D
• https://www.synechron.com/insights/a-smart-approach-blockchain- (SEC Exemption) equities.
• https://www.ledgerinsights.com/dtcc-blockchain-tokenize-private-securities-public-
collateral-management-bringing-banks-and-blockchain-together ethereum/

• • Paxos, Credit Suisse Claim First Blockchain-Based Settlement of

Vanguard Advances Blockchain Technology Pilot To Streamline Asset- US Equities - https://www.coindesk.com/paxos-credit-suisse-claim-first-blockchain-
Backed Securities Markets based-settlement-of-us-equities
• https://www.prnewswire.com/news-releases/vanguard-advances-
blockchain-technology-pilot-to-streamline-asset-backed-securities-
markets-301074465.html

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Blockchain Implementations

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Blockchain Implementations

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 Q&A
Thanks you for your time.

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