FI410 Unit 5 Atomic Settlement Case Study Example

Seconds to Settle, Six Times the Cash: A Unit 5 Settlement Case Study of Atomic Equity Settlement at a Regional Broker-Dealer

[Student Name]

Purdue University Global

FI410: Blockchain for the Financial Industry

Unit 5 Settlement Case Study

[Instructor Name]

[Date]

The broker-dealer, its pilot and every figure are composite; the article, principles and rule cited are real.

The Firm and the Pilot

The broker-dealer executes equity trades for about 60,000 retail and small institutional clients. Like every US broker-dealer, it settles trades one business day after execution, the standard since the securities regulator shortened the cycle from two days to one in 2024 (Shortening the Securities Transaction Settlement Cycle, 88 Fed. Reg. 13872, 2023). Its trades pass through a central clearinghouse that nets them and guarantees completion.

A technology consortium has invited the firm to pilot atomic settlement for a subset of liquid stocks. On a permissioned ledger, each stock would exist as a security token and dollars as a tokenized cash balance held at a participating bank. A trade would settle the instant it executed: the security token and the cash token would move together in one step, so neither side could deliver without receiving.

The case examines one ordinary trading day, a Tuesday in March, under both systems.

The Baseline: Netting at T+1

On the sample day, the firm executed 4,300 trades worth $1.4 billion gross, buys and sells together. Many offset one another. Clients bought and sold the same stocks, and the firm's own purchases and sales partly offset each other. The clearinghouse netted all of them into a single obligation: the firm owed about $42 million on Wednesday.

Netting is the key to the baseline's efficiency. The firm needed to have $42 million ready by Wednesday, not $1.4 billion. The clearinghouse stood between the firm and every counterparty, guaranteeing that if any trading partner failed, the trade would still complete. In return, the firm posted margin with the clearinghouse, about $18 million that day, sized to the risk of its unsettled positions.

The Pilot: Atomic, Gross Settlement

Under atomic settlement, each of the 4,300 trades settles on its own, at the moment of execution. There is no netting, because there is no time between execution and settlement in which to net. Every purchase requires the cash to be in place, as tokenized cash on the ledger, before the trade can execute.

The firm modeled its cash need through the day. Purchases cluster at the open and the close; sales proceeds arrive as sales execute but cannot always fund purchases that happen earlier. The firm's intraday funding peak reached about $250 million just after the open, roughly six times the netted Wednesday obligation.

Atomic settlement removes the time between trade and settlement, and with it the counterparty risk that time created, but it also removes netting, so a firm that once needed $42 million the next day now needs about $250 million in the morning, and liquidity becomes the risk it must manage.

Comparing the Two on Four Measures

Counterparty exposure. Under T+1, the firm is exposed for one day to the possibility that a counterparty fails before settlement, though the clearinghouse absorbs that risk. Under atomic settlement, there is no exposure at all, because nothing is owed after execution. This is the pilot's clearest gain.

Liquidity need. Under T+1, the firm needs $42 million on Wednesday plus $18 million in margin. Under atomic settlement, it needs up to $250 million at the open, with no margin. The firm would have to borrow the difference intraday, hold it as tokenized cash or limit its clients' trading. Research on blockchain settlement shows exactly this trade-off: faster settlement reduces the risk that a trade fails but raises the cost of having cash and securities in place at the moment of trade (Chiu & Koeppl, 2019).

Failed trades. Under T+1, a failed trade, usually from a missing security or late cash, is caught before settlement and resolved under clearinghouse rules. Under atomic settlement, a trade without cash in place simply does not execute. That prevents fails but may reject client orders the firm would have filled.

Error correction. Under T+1, an error such as a wrong quantity can be caught and corrected in the day before settlement. Under atomic settlement, the error settles instantly and must be reversed by a second trade, which requires the counterparty's cooperation and new cash.

Who Inside the Firm Carries Each Risk

The pilot moves risk from the clearinghouse to the firm's own departments. The treasury desk now carries intraday liquidity risk and must arrange funding lines that open before the market does. Operations carries error risk without a buffer day. Client service must explain rejected orders. Compliance must confirm that the pilot meets the international principles for settlement systems, which expect a system to manage liquidity and settlement risk explicitly, whatever technology it uses (Committee on Payment and Settlement Systems & Technical Committee of the International Organization of Securities Commissions, 2012). The clearinghouse's guarantee, which the firm paid for through margin and fees, no longer protects these trades.

What It Would Cost

Because tokenized cash must sit on the ledger before the open, the firm would need to pre-fund about $208 million beyond its netted need every trading day. Borrowed at 5.3 percent a year, that costs roughly $30,000 a day, or about $7.6 million over 252 trading days. Against that, the firm saves about $18 million in margin it no longer posts, worth perhaps $950,000 a year at the same rate, plus clearinghouse fees of about $1.1 million. The net cost is roughly $5.5 million a year.

What the Pilot's Sponsors Would Answer

The consortium would make three points. First, if many firms joined, the ledger could offer its own netting or intraday credit, lowering the funding peak. Second, tokenized cash could earn interest if issued by a bank as a deposit, reducing the cost of holding it. Third, removing the clearinghouse margin frees capital in volatile markets, when margin calls are largest. Each point is fair, and each depends on features the pilot does not yet have. The case evaluates the pilot as offered, and treats these as conditions for a second look.

Conclusion

The pilot works technically and removes counterparty risk, but for this firm it trades a small, well-managed risk for a larger liquidity cost. Atomic settlement suits markets where trades do not offset much, such as large block trades between institutions, better than retail flow that nets heavily. The firm should limit the pilot to institutional block trades, where the funding peak is lower and netting benefits smaller, and keep retail flow at T+1.

References

Chiu, J., & Koeppl, T. V. (2019). Blockchain-based settlement for asset trading. The Review of Financial Studies, 32(5), 1716-1753. https://doi.org/10.1093/rfs/hhy122

Committee on Payment and Settlement Systems & Technical Committee of the International Organization of Securities Commissions. (2012). Principles for financial market infrastructures. Bank for International Settlements.

Shortening the Securities Transaction Settlement Cycle, 88 Fed. Reg. 13872 (Mar. 6, 2023).