Shanghai Stock Exchange: New Regulation 'Crucial' to Clear Way for DLT

Shanghai Stock Exchange (SSE), one of the world's largest securities trading venues by market capitalization, is eyeing the use of distributed ledger technology (DLT) in the securities market.

The SSE published a research paper on Tuesday, which analyzed the use of DLT in various stages of a security transaction, such as the pre-trading customer registration, securities issuance and trading, and post-trading settlement.

It went on to summarize some key benefits of adopting DLT in China's financial infrastructure, such as increasing the settlement efficiency by replacing the current T+1 model, under which a transaction can only be settled one business day after an order is executed.

As the world's fourth largest stock exchange with a market cap of $5.12 trillion as of December 2017, the SSE is a non-profit organization directly administrated by the China Securities Regulatory Commission.

With references to existing works focused on the topic carried out by its counterparts in other financial markets such as Hong Kong and Australia, the SSE identified two potential areas in the report where DLT may be beneficial in China, stating:

"A general worldwide consensus is that DLT will be a new revolution for the financial industry. The first application use cases will be over-the-counter securities issuance and trading, as well as order book post-trading settlement."

That said, the research paper suggested that a potential deployment of DLT at the Chinese stock exchange could still face a series of regulatory hurdles, as it is in conflict with the current centralized registration and settlement system.

For instance, the SSE currently uses a third-party intermediary as custodian and for settling post-trading transactions, yet the use of DLT could fundamentally eliminate that system. To do that, the market needs new legal framework issued by regulators and central government agencies.

The paper's author concluded:

"Regulation should adapt to the evolving technology. We suggest regulators treat the topic of DLT as a crucial study area moving forward ... in order to develop a solid regulatory framework for embracing the financial innovation."

Shanghai Stock Exchange image via Shutterstock