Digital issuance

Driving the transition towards digital financial markets

Financial markets are going digital. The emergence of electronic securities and the digitisation of issuance processes are at the forefront of the financial industry’s digital transformation. Both require a new digital generation of financial infrastructure such as Deutsche Börse’s digital post-trade platform D7.

Issuance – how new securities are created

Before a security can be traded either over the counter (OTC) or on-exchange, it can be issued via a central securities depository (CSD). Securities can be created in a physical, paper-based form as either individual or global notes. They can also be created in a dematerialised form, where an electronic entry represents the security. The physical as well as the electronic record contains all the relevant information related to the security, such as issuer name, ISIN, volume, number of shares, and maturity date. The security is then stored safely in a physical or electronic vault. Market participants, such as banks, exchange operators and other intermediaries, mirror the information related to the security in their systems for trading.

Central securities depositories

Most countries operate a central securities depository (CSD), typically one per country for all asset classes, or one per country per asset class (e. g. government debt in one CSD and other securities in another CSD). Clearstream, Deutsche Börse Group’s post-trade services provider, operates the CSDs for Germany and Luxembourg, as well as an international CSD (ICSD) for what is called the Eurobonds market.

Also read: Central securities depositories – Providing efficient and reliable recording and safekeeping of cash and securities

From paper to digital issuance

Several countries require global notes to be printed, using a lot of paper, adding cost, time and potential for error to the process. In recent years though, many authorities have passed laws to allow for dematerialised issuances. In 2021, Germany passed such a law, the Electronic Securities Act. Since then, more than 100,000 digital, i.e. paperless, issuances have been processed by Clearstream (as of July 2024).

Paper-based issuances in Germany

More than 7 tonnes of paper per year are used for the printing of necessary documents for the up to 5 million issuances taking place into the German market. The vast majority of securities issued are structured products, with retail investors as the target audience.

60% of approximately 4 million structured products issued every year in Germany never reach the trading floor. They either get knocked out immediately or the price was far out of the market when trading for these products started for the first time as underlyings, such as indices, already had developed further.

Digital issuance for tomorrow’s financial markets

Electronic, i.e. dematerialised, issuance is the first step towards digital markets. Electronic global notes may be paperless, but they are using the same traditional processes as before. Instrument data and instrument event data are still separately mirrored in each participant’s systems. In case of a trade or corporate event, the information needs to be updated everywhere separately. This process is known as the reconciliation process which adds costly, time-consuming, and error-prone measures.

Globalised markets, the rise of innovative technologies and changing investor needs have been calling for faster, leaner, and automated issuance processes. With its digital post-trade platform, D7, Deutsche Börse Group has created a fully digital alternative to conventional physical issuance and processing of securities. To issue a security, D7 creates a digital instrument, meaning a digital representation of the electronic global note. This digital instrument serves as a “golden source” of information for all participants because D7 connects directly to the existing and new systems of issuers, intermediaries, and investors, reducing reconciliation needs to a minimum. Going forward, D7 will ensure that issuers can digitise their financial products with continuing access to both existing central and distributed infrastructures and markets. After launch in the German market, D7 will be enhanced to the Luxembourg and international markets.

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Physical issuance can take up to two days for all participants to have the same information in their books. With digital issuance, financial instruments can be ready for trading within less than ten minutes, saving time and cost, and creating more efficient, safe, and liquid financial markets.

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