Tokenisation, Part 2: Trading is not settlement.
Let's say Alice sells 1,000 shares to Bob.
Alice has the shares. Bob has the money. They agree on a price.
Simple enough, right?
Well... not quite.
In traditional financial markets, agreeing to a trade and actually exchanging the assets are two different things.
The trade happens first.
But the shares haven't necessarily moved. Neither has the money.
Alice now owes 1,000 shares. Bob owes the agreed amount.
Essentially, they've shaken hands. But nobody has handed over the goods yet.
And that raises an important question:
What happens if one of them doesn't deliver?
Enter the CCP.
No geopolitics involved this time. CCP stands for Central Counterparty.
In many securities markets, this institution steps between buyers and sellers, becoming the buyer to every seller and the seller to every buyer.
Think of Prop Joe from The Wire, acting as an intermediary between Baltimore's different crews.
Except that in financial markets, the middleman is heavily regulated, requires collateral, and has considerably more formal procedures for dealing with trouble.
So why introduce another institution into what looked like a simple transaction?
Because clearing performs four important functions:
1️⃣ Novation: The CCP replaces the original bilateral obligations. Alice and Bob now each deal with the CCP instead of directly with each other.
2️⃣ Netting: Rather than settling hundreds of individual trades separately, obligations can be combined into smaller net positions. Fewer securities and less cash need to move.
3️⃣ Margin: Participants provide collateral to cover potential losses. Think of it as a financial security deposit.
4️⃣ Default management: If someone fails to meet their obligations, the CCP has procedures and financial resources to manage the consequences.
So clearing isn't just administrative bureaucracy.
It reduces settlement obligations and helps manage the risks that exist between trading and settlement.
Now, here's where tokenisation becomes interesting.
Traditional financial-market infrastructure developed around a world where trading and settlement are separate events.
But what if securities and money could change hands almost immediately through blockchain-based infrastructure?
Would we still need the same clearing mechanisms?
Would netting remain equally valuable?
How much counterparty risk could disappear? And what risks would remain?
Faster settlement doesn't automatically eliminate the need for clearing. Netting and risk management can still have important roles.
But it could fundamentally change which problems clearing needs to solve.
And that's a much more interesting conversation than simply putting shares on a blockchain and calling them "tokenised".
Next in the series: settlement and custody.
And why today's securities market looks like a layer cake of interconnected ledgers.