Distributed Ledger Intraday Trading via Smart Contract Settlement
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Solution Overview
Problem
The increasing cost of liquidity and reduced availability of intraday liquidity in financial markets lead to stress in payment, clearing, and settlement activities, with existing operational processes limiting the meaningful use of intraday repo transactions for active liquidity management.
Innovation Solution
Implementing distributed ledger-based systems for intraday trading, settlement, and recordkeeping, which involve receiving digital representations of collateral and cash, executing trades via smart contracts, and ensuring sufficient collateral and cash through ringfencing and segregation, enabling instantaneous or near-instantaneous settlement and minimizing risk.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If distributed ledger-based systems with smart contracts are implemented for intraday trading, then credit/counterparty risk is reduced and settlement efficiency is improved, but device complexity and system infrastructure requirements increase
Solution Approach 1:
The patent uses digital representations (tokens) on the distributed ledger to copy and represent physical cash and collateral assets. This allows the system to track and transfer ownership of these assets without moving the physical assets themselves, reducing counterparty risk while maintaining a simplified interface for users who interact with digital tokens rather than complex underlying asset structures.
Solution Approach 2:
The distributed ledger acts as an intermediary layer between cash providers and borrowers, enabling direct peer-to-peer transactions without traditional intermediaries like central banks or clearinghouses. The smart contracts serve as automated intermediaries that enforce trade terms and facilitate settlement, reducing credit risk through transparent, immutable record-keeping while the complexity is contained within the system infrastructure rather than requiring complex user-side implementations.
2Productivity
If intraday repo transactions are used for active liquidity management, then deployment of capital is enhanced, but existing operational processes create limitations and operational stress
Solution Approach 1:
The system enables participants to autonomously manage their own liquidity through the distributed ledger platform. Users can directly post collateral, receive digital representations, and execute trades without requiring complex operational processes or manual intervention from intermediaries. The smart contracts automatically enforce trade terms and facilitate settlement, allowing participants to actively manage their capital deployment while the system handles the operational complexity in the background.
3Loss of time
If digital representations of collateral and cash are transferred via smart contracts, then settlement is instantaneous or near-instantaneous, but verification and validation processes add operational steps
Solution Approach 1:
The system performs preliminary verification of collateral and cash before trades are executed. The distributed ledger maintains pre-validated digital representations of assets, and smart contracts are pre-programmed with verification logic that automatically checks trade terms, collateral adequacy, and cash availability before execution. This preliminary action ensures that when trades are executed, settlement is instantaneous because the verification work has already been done in advance, with the complexity contained within the smart contract code rather than requiring complex real-time verification processes.
Data Source
AI summary
Systems and methods for distributed ledger-based intraday trading are disclosed. In one embodiment, a method may include: receiving a digital representation of an amount of collateral for a cash borrower; receiving a digital representation of an amount of cash for a cash provider; receiving agreement from the cash borrower and the cash provider to terms of an intraday trade comprising a duration of the intraday trade, a collateral trade amount of the collateral, and a cash trade amount of cash; a smart contract executing the intraday trade by providing the trade amount of the digital collateral to the cash provider and the cash trade amount of the digital cash to the cash borrower; and the smart contract returning the trade amount of the digital collateral to the cash borrower and the cash trade amount of the digital cash to the cash provider at the completion of the intraday trade.