Institutional investors are cautiously increasing their allocation to digital assets as they are attracted by the return and diversification opportunities offered by digital instruments and become more comfortable with the market infrastructure and risk management frameworks supporting these investments. CHICAGO/LONDON, April 25, 2022 – Trading Technologies International, Inc. , a global provider of high-performance professional trading software, infrastructure and data solutions, announced that London-based industry veteran Nick Garrow has joined the firm today in the new position of EVP Multi-Asset & Buy Side. Garrow has more than 20 years of senior management experience in capital markets and prime brokerage, leading significant global technological and operational transformation of businesses ranging from a tier-1 bank, to brokerage and clearing firms, to an exchange and fintech company. State Street CEO Ron O’Hanley says that the financial industry is gradually transforming to a digital economy and digital assets are likely to be one of the most significant forces that will shape this industry’s development over the next five years. “Digital assets are becoming integrated into the existing framework of financial services and it is critical that we have the tools in place to provide clients with solutions for both the traditional investment needs and their growing digital needs,” he says. SFT asked Deutsche Börse how these market developments will shape its strategy as a trading and post-trade infrastructure group, with more than €16 trillion of assets in its custody though its CSD and ICSD business and a global funding and financing division seeking to optimise collateral and liquidity mobilisation on clients’ behalf.

In the US, for example, the Securities and Exchange Commission has established rules (under SEC Rule 17f-5) that require a US investment fund holding assets outside of the US to place these in safekeeping with an ‘eligible foreign custodian’. Similarly, SEC Rule 17f-7 specifies that, when employing the services of a central securities depository outside of the US, a US investment fund may only use a CSD that meets its ‘eligible foreign depository’ specifications. To harness the benefits of securities tokenisation to support collateral optimisation, Deutsche Börse Group is a major shareholder in Luxembourg-based fintech HQLAX which aims to support collateral transformation trades but without the need to transfer securities between custody accounts of the trading parties.

Risk Management

For fund custodians with activities in the EU, a liability regime has grown out of the Alternative Investment Fund Manager and UCITS V directives which makes the fund custodian directly liable for any “avoidable loss” of any financial instrument held in custody on behalf of a fund client. To ensure our website performs well for all users, the SEC monitors the frequency of requests for content to ensure automated searches do not impact the ability of others to access content. Current guidelines limit users to a total of no more than 10 requests per second, regardless of the number of machines used to submit requests. The products, services, information and/or materials contained within these web pages may not be available for residents of certain jurisdictions. Please consult the sales restrictions relating to the products or services in question for further information. From 1999 to 2005, he served as Global Head of Sales for trading software firm Patsystems in London.

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Nasdaq Crypto Index Family

Two to three years ago, investment in these instruments was dominated by high-net worth investors, hedge funds and specialised investors. However, the investor landscape is changing and institutional investors are now dedicating an increasing component of their asset allocation to digital assets. This may be through direct holdings of crypto assets, or through exchange-traded notes , derivatives or collective investments with exposure to crypto and digital assets. Trading Technologies () creates professional trading software, infrastructure and data solutions for a wide variety of users, including proprietary traders, brokers, money managers, Commodity Trading Advisors , hedge funds, commercial hedgers and risk managers. In addition to providing access to the world’s major international exchanges and liquidity venues via its TT® trading platform, TT offers domain-specific technology for cryptocurrency trading and machine-learning tools for trade surveillance.

“By doing so there is an opportunity to interconnect the whole capital markets value chain of participants across international nodes , to trade, clear and settle traditional assets and digital assets and eradicate the age-old exchange silos,” he says. In building its digital asset capability, BNY Mellon’s Mike Demissie says that his organisation is focusing on extending the core services that it is best known for, such as fund services and custody, out to digital assets. Deutsche Borse’s Jens Hachmeister says that his organisation is observing broader adoption of crypto currencies and crypto assets by institutional investors.

Trusted by the world’s top-tier banks, brokers and trading venues, we provide consistent, reliable access to the most current and innovative trading solutions available. The new division aims to capitalise on State Street’s existing digital expertise and to extend this xcritical app to include crypto, central bank digital currencies and tokenised securities. This will be built around the bank’s proprietary GlobalLink technology platform, with plans to develop this into a multi-asset platform supporting crypto assets alongside other asset types.

Hirander Misra, chairman and CEO of GMEX Group, provider of multi-asset exchange trading and post-trade solutions, says there is strong client demand for the full spectrum of digital and hybrid services. However, interoperability and time to market remain a challenge, with traditional infrastructure and multiple types of blockchain-enabled digital market infrastructure being severely fragmented. Misra anticipates that further refinements to the regulatory framework in these Western jurisdictions are likely to make digital assets more attractive to both retail and institutional investors, while addressing some of the inherent risks. Meanwhile some other markets — Singapore, for example, and the Seychelles on a smaller but significant scale — continue to deliver creative developments to support digital asset activity.

Global Crypto Etp Market: State Of Play

This will ensure more effective credit allocation, netting and settlement across OTC and exchange-traded digital asset activity, with effective custody choice being at its core. In the post-trade area, Deutsche Börse is researching the design of what it calls a ‘next generation post-trade infrastructure’. This is building on recent developments in regulation, particularly the Electronic Securities Act in Germany and recent legislation in Luxembourg governing application of blockchain.

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For investments in ‘traditional’ securities, principles have grown up over decades that provide guidelines for safekeeping institutional assets. Standards have been refined, with input from the financial regulators and industry associations, to establish a set of guiding principles that are applied when appointing a custodian or holding securities with a central securities depository . In parallel, the European Commission has announced a pilot regime for market infrastructures — effectively a regulatory sandbox that allows the financial authorities, infrastructure providers and market participants to explore the development of a robust market infrastructure based on DLT. Misra identifies a number of developments that are important to delivering more effective control and governance around digital asset activity and which are likely to translate into new opportunities and efficiency in securities financing transactions. Serving since 2019 as Global Head of IT and Operations for Societe Generale Prime Services in London, Garrow will now lead TT’s expansion into new asset classes beyond exchange-traded derivatives and a range of new services for the buy-side community, with the firm’s Software-as-a-Service TT® platform as the foundation. Commerzbank, UBS and Credit Suisse have been active in the project since 2018 as early adopters and, alongside involvement from Deutsche Börse Group, there other major tri-party collateral players, notably Euroclear and JP Morgan.

State Street’s Werner feels that US regulators have placed the burden primarily on market participants to identify how digital assets can fit within the existing regulatory structure, particularly from a custody perspective. Given the unique attributes of digital assets, and the technology employed to support them, Werner believes that greater regulatory clarity will be valuable in this area — for example in defining standards of control and safekeeping by a custodian in the digital asset arena. Central to the progress of these developments will be steps to harmonise regulations and market standards across ‘traditional’ and digital assets, streamlining oversight procedures and reducing fragmentation across ‘traditional’ and digital asset pools. Some fintechs have moved directly to the digital world and do not offer an infrastructure to support legacy assets.

The basic principle involves keeping the underlying securities where they are and completing exchange of ownership on a layer above, specifically through tokenised transfer on a DLT-based registry, notes HQLAX’s chief operating officer Nick Short. The company is now expanding that original operating model in small, incremental steps as it brings new strategic partners on to the platform. These each have different needs and are connecting to the platform in slightly different ways — and HQLAX is delivering the interoperability required to connect together these previously fragmented pools of collateral. For security purposes, and to ensure that the public service remains available to users, this government computer system employs programs to monitor network traffic to identify unauthorized attempts to upload or change information or to otherwise cause damage, including attempts to deny service to users. In 2014, after the acquisition of Newedge by SG, Garrow was elevated to Global Head of Cross-Asset Technology in London for SG Prime Services, integrating the listed derivatives and cash equity trading technology for the agency business. He took over all of the pre-trade and post-trade technology for the Prime Services business in 2017, leading a team of more than 300 people.

Historically, silo-based approaches to business development have impaired fluid movement of collateral and liquidity – and it is important that these inefficiencies are not replicated as organisations build a multi-asset infrastructure to support both legacy and digital assets. When asset classes operate on different underlying infrastructure, this can present challenges in optimising and mobilising collateral and minimising funding costs. Against this background, firms are prioritising the need for a transparent view of their assets and liabilities and improved use of their inventory for collateral purposes. Jens Hachmeister, Deutsche Börse’s head of issuance and new digital market, explains that Deutsche Börse Group has been building its digital markets strategy since 2015. This began with an exploratory phase, which lasted approximately three years, and from 2018 it has become part of Deutsche Börse’s core strategy. The financial infrastructure group has been evaluating how it can support digital assets and securities alongside traditional assets and how best to unlock the benefits made available through distributed ledger, smart contracts and other relevant technology in the field of digital securities.

Internet Security Policy

Looking further ahead, Fechter says that there will ultimately be a ‘new world’, perhaps 15 or 20 years from now, where asset holdings are fully digitised and trading and post-trade services will principally involve servicing digital assets. He then joined global futures commission merchant Calyon Financial as European Head of Electronic Trading Sales. In 2009, Garrow was promoted to Global Head of Electronic Trading Technology for Newedge, the multi-asset FCM created by the merger of Calyon Financial and FIMAT. In that role, he led a significant overhaul and upgrade of the firm’s electronic trading platforms across exchange-traded derivatives, equities, foreign exchange and fixed income, working from Chicago and London. Ullink provides global, market leading multi-asset trading technology and infrastructure for buy-side and sell-side market participants.

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Solutions And Services

In January 2021, HQLAX completed a €14.4 million funding round with BNY Mellon, Goldman Sachs, BNP Paribas Securities Services , Citi and Deutsche Börse Group. These companies will also connect to the platform and play different roles, for example with BNY Mellon as a tri-party agent and agent lender, and Citi as custodian. Instead, a tokenised transfer of ownership takes place on distributed ledger technology, while the underlying securities remain static and are kept off blockchain (see the interview on p.26 of this issue). The platform is accessed via Eurex Repo’s trading system, with Deutsche Börse standing as “trusted third party”, holding baskets of securities at tri-party agents and custodians on behalf of market participants. State Street managing director for digital product development and innovation Swen Werner says that State Street has been actively developing its digital asset capability for a number of years, but the speed and breadth of change is now getting stronger. “[State Street’s Digital Asset Division] is an investment in tomorrow, but a strong signal now to our partners, clients and the general market that we are open for business,” he says.

This will also include the development of more sophisticated, higher-margin products in the digital asset world, including lending and prime brokerage opportunities to improve return on digital asset inventories and to enhance market liquidity. Between these two phases, however, there will be a hybrid environment which will involve a combination of ‘traditional’ and digital assets. “We believe that the winners, those who will capture most market share, will be those that can best service this hybrid state,” says Fechter. GMEX’s Misra predicts that, over the next two to three years, end-to-end platform-driven solutions will develop further, with a multi-custody approach ensuring not only that market participants have choice in selecting custody options but also that there is greater asset portability.

Asset Class Perspectives

Crypto asset service providers licensed under MICA will have passporting options, enabling them to market their business anywhere within the EU. They will also be required to fulfil EU organisational and capital requirements, including conducting AML and KYC verification on their customers. This will include delivering real-time netting and settlement, along with the opportunity to re-use assets.

Hachmeister says that these regulatory changes open new opportunities to digitise and dematerialise securities, extending potential for digital issuance of bearer bonds and a range of collective investments. To support these developments, BNY Mellon formed a digital asset division in February 2021 designed to accelerate the development of solutions for clients wanting to build exposure to digital assets, including cryptocurrencies. For digital assets, however, an equivalent liability regime and set of custody standards is still in formation – and while this remains the case, some institutional investors have been cautious about increasing their allocations to digital assets. Moreover, financial authorities are still firming up their positions regarding how digital assets should be regulated. GMEX ’s Hirander Misra observes that In the UK and EU, the fifth Anti-money Laundering Directive requires providers of crypto platforms and wallets to identify their customers for anti-money laundering purposes. However, whilst security tokens and crypto derivatives are covered by MiFID II, spot crypto is still an unregulated asset class from the perspective of operating a trading venue and crypto custody in the UK.

Success — at least for the large established banks, broker-dealers and market infrastructure providers — will be built on the ability to service both non-digital and digital assets. We give clients the freedom to choose from modular products tailored to their individual needs, as well as fully serviced solutions for an entire trading infrastructure, supported by truly global data centres. Ullink’s agile technology and market leading network can be deployed within client’s existing infrastructure, as part of a fully-managed service or through a hybrid model. In closing, Hirander Misra says that GMEX, and its digital financial services ventures such as SECDEX, are continually looking for opportunities to innovate as digital asset markets evolve. SECDEX is experiencing rising demand for security tokens and provision of white-label solutions for new areas such as non-fungible tokens . This will be important in driving convergence between the regulatory framework for crypto assets and the rules established under MiFID and MiFID II for traditional securities.

“This is a world where HQLAX is currently helping to manage collateral transformation through tokenised exchange supported on blockchain,” says Fechter. In this environment, HQLAX is serving as a translator, applying some of the advantages of the new digitised world to address the inefficiencies prevailing in securities lending and collateral transformation transactions in the ‘old world’. Looking ahead, asset owners will potentially hold inventories of both ‘traditional’ and digital assets with Clearstream.

Over the course of seven years, he worked in the Paris and London offices, building the exchange’s pan-European membership and electronic trading connectivity. In the EU, the Markets in Crypto-assets regulation provides a framework for regulating crypto assets and aims to provide a single licensing regime across all EU member states by 2024. This is also key in the securities finance and collateral management arena, where an enduring challenge has been to eliminate fragmentation in collateral pools, across jurisdictions and across product lines, enabling optimised collateral allocation from a centralised collateral inventory. Securities finance experts are applying advantages from the new digitised world to address historical inefficiencies in securities lending, financing and collateral management. Since 2001, Ullink has established itself as one of the fastest growing technology companies in the industry. In 2014 Ullink acquired NYFIX and Metabit from the New York Stock Exchange, further expanding its product offering by creating one of the industry’s largest FIX based trading communities.

Misra reports that the US digital asset market is evolving rapidly, with positive signals coming from the Options Clearing Corporation regarding use of stablecoins. Although developed initially by the SEC to apply to US investment funds , these have become a de facto standard internationally to guide custodian selection and CSD due diligence. To allow for equitable access to all users, SEC reserves the right to limit requests originating from undeclared automated tools. Your request has been identified as part of a network of automated tools outside of the acceptable policy and will be managed until action is taken to declare your traffic. In 2019, he assumed responsibility for all global IT and operations for the agency business, driving a significant overhaul of the bank’s legacy technology and a new global operating model for the more than 600-person IT and operations teams.

Globally Integrated Resource

GMEX is also active as a technology enabler, focusing, among other projects, on core software and software-as-a-service solutions for trading, exchange and post-trade market infrastructure. “Demand from existing exchanges and post-trade venues continues to grow as they seek digital transformation, alongside demand from newer trading venues and digital custodians,” says Misra. He identifies an ‘old world’ that has been dominated by non-digital (ie ‘traditional’ or ‘legacy’) assets.

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