Analysts at Metzler Capital Markets believe it is likely that distributed ledger technology will become the dominant technology in the business of Clearstream, Deutsche Börse's securities custodian and settlement provider, in the future.
The Frankfurt-based financial services firm see DLT less as a threat and more as an opportunity for Deutsche Börse - provided the German exchange acts early and underpins its current market position with a range of distributed technologies.
According to industry analyst Jochen Schmitt, DLT will be a disruptive force in securities settlement: "Particularly in the custody and settlement of securities, we believe DLT offers great potential and advantages for almost all parties involved - the main exception would probably be traditional securities custodians if they do not adapt to this development early on."
Clearstream has the opportunity to gain international market share if it acts early, says Schmitt, although any substantive breakthrough is likely to take many years as it butts up against vested interests in the custodial space.
However, securities settlement via DLT could reduce the time required in Europe, for example from T+2 to T+O and significantly reduce the need for cash or collateral for settlement - which Scmitt believes will act as a spur to development and achieve buy-in from market participants.
Deutsche Börse is already preparing for the phased launch of a new cloud-backed and DLT-ready platform, D7, paving the way for same-day-issuance and paperless, automated straight-through processing for the entire value chain of issuance, custody, settlement, payment and asset servicing for digital securities.
Anchored in the recently introduced German digital securities law framework, the D7 platform is being developed in collaboration with long-term technology partners Digital Asset and Microsoft, as well as R3 and VMware.
The Exchange has also roped in a host of market participants to help with the project, including BNP Paribas, Citi, DekaBank, Deutsche Bank, dwpbank, DZ Bank, Goldman Sachs, Raiffeisen Bank International and Vontobel.
The complete functionality of the D7 platform will be rolled out in phases over the next few years, beginning with the implementation of a digital central register at Clearstream Banking this month. By mid-2022, D7 will move to same day issuance and the introduction of paperless certificates and warrants. Over the following two years DLT capabilities will come onstream, including connections to existing offerings, such as HQLAx for collateral basket lending service and FundsDLT for funds administration/distribution.
The current valuation of Deutsche Börse's share with an estimated P/E ratio 2022e of around 20 does not adequately reflect the group's strong market position, says Schmitt. Reasons for the valuation discount could be concerns about the future impact of DLT on Clearstream, which, "are not justified" he adds.