Insights

Reducing Risk and Increasing Participation in Digital Markets

Cobalt is a trusted shared ledger that is agnostic to custodian and execution venue. It recognises that outside of a walled garden, the intra-custodian market has very real settlement and market risk. To give clients best market access, custodians need to have complete transparency and control to ensure that counter custodian credit risk is limited to their level of comfort. They also need execution venues to maintain high standards of credit management and execution notices.

Payment netting is important not just across traded pairs but also net settlement obligations across all trades. Whilst settlement windows are shorter than traditional markets, portfolio mark to market is important in volatile conditions. This is especially true where new derivatives are increasingly coming to market. The need to minimise settlement and mark to market risk, requires compression of obligations between trusted multilateral groups driven by ledger AI. Only a shared infrastructure like Cobalt knows the interconnectedness of the market to enable automated, real-time compression cycles. Participants are able to set rules to mutually agreed compression and settlement outcomes for golden copy trade portfolios. From collateral held at custodians, Cobalt communicates buying power across multiple execution venues simultaneously and in real-time whilst maintaining the pre-settlement score card and orchestrating net settlements.

Only touching the layer one chain when necessary, Cobalt clients can elect to de-risk through settlement also updating credit profiles, supported by the underlying assets. This is where DA and TradFi markets diverge as traditional markets make assumptions about settlement that is not based on reality. In digital markets the stakes are higher as assets are highly volatile and settlement risk very real. Settlement, therefore, needs to be included in the credit life-cycle.

Currently there is too much human involvement in pre-funding and settlement in digital markets but there is now a strong desire to resolve these issues and create an infrastructure that does not repeat the existing problems of TradFi.