SIX Digital Exchange will provide segregated custody to RULEMATCH, the Swiss spot crypto trading and settlement venue for institutions, eliminating the need for them to pre-finance their trading activities as assets will be held securely off-venue.

From the fourth quarter of this year, institutions will be able to use RULEMATCH with SDX holding their assets in custody in accounts that are segregated by crypto address.

David Newns, head of SIX Digital Exchange (SDX), told Markets Media that the requirement for pre-funding crypto trading is a clear constraint on volumes and activity. He said: “Solving this is really important for wholesale adoption and for the integration of this asset class into the institutional ecosystem.”

David Riegelnig, chief executive of RULEMATCH, agreed that separating the roles of trading and custody is critical for institutions as the requirement to pre-fund was a barrier to institutions entering crypto. He added: “The connection with SDX custody allows institutions to manage collateral dynamically and very easily, and post-trade settlement makes it capital efficient, including multilateral netting.”

Netting allows trading firms to make just one settlement each day with the custodian for each asset class.

RULEMATCH

Riegelnig said the founders of RULEMATCH came from a traditional banking background and wanted to build a venue for banks, securities firms and regulated intermediaries to trade cryptocurrencies such as bitcoin and ethereum, which are not securities. However, as they are not securities, there are no clearing houses so crypto venues require trades to be pre-funded.

“RULEMATCH is never a counterpart and we facilitate trades as an agent by maintaining clients’ wallets, which are off-balance sheet, and they pay a margin,” said Riegelnig. “This is something our participants like and is a unique selling point.”

However, ideally participants want to work with a custodian, which will be provided by the SDX partnership. Riegelnig added that RULEMATCH is run on the Nasdaq matching engine, risk and market surveillance technology stack so institutions can rely on the integrity of the matching process and the venue includes mechanisms such as circuit breakers so there are no flash crashes.

RULEMATCH went live in December 2023 and Riegelnig said the firm is “quite pleased” with having 12 banks and securities firms on board.

“We have the same number, or even more, in different phases of the onboarding process so we certainly see continued growth from institutions,” he added.

London-based digital prime broker GCEX recently joined RULEMATCH as a trading participant and as a provider of sponsored access. RULEMATCH said hedge funds and active trading firms can trade spot crypto at execution speeds of 25 microseconds.

Newns described the team at RULEMATCH as highly entrepreneurial individuals who also have deep institutional experience. As a result, they have come to the marketplace with an awareness of the demands in the institutional space and benefit from a really good network across the Swiss Financial Center.

“Given our position as a financial market infrastructure and our crypto custody offering, it was a very neat fit for the two organizations,” Newns added. “We are going to start seeing solutions like this one, which will allow custodians to provide solutions for using digital assets as collateral.”

Growth

Newns said RULEMATCH is clearly close to home, but SDX is also looking to provide this clearing solution in other partnerships as capital efficiency and optimization of collateral utilization are emerging as central priorities. and as such will be critical differentiators for venues in the future.

“We are excited about enabling the efficient management of collateral, and working, in conjunction with SIX SIS, on the ability to co-mingle crypto and securities in the single Collateral Cockpit,” he added.

The Swiss National Bank (SNB) has been using SDX in its Project Helvetia initiative, in which the central bank has been collaborating with financial institutions to develop digital financial markets.

In June this year the SNB carried out monetary policy operations on the SDX blockchain and Newns said the significance of this has perhaps been underestimated. Newns added that this marked a turning point in Switzerland by proving that a central bank could safely conduct such critical activities using tokenized central bank money on live blockchain infrastructure, which had previously only ever taken place on traditional infrastructure.

“I am extremely pleased with SDX’s performance this year, as the Helvetia Phase III wholesale Central Bank Digital Currency (wCBDC) project proved to be a remarkable success, allowing the SNB and SDX to achieve several industry milestones with the first ever wCBDC securities issuances,” said Newns. “We are highly satisfied with SDX’s flawless operation as a platform and are grateful for the Swiss National Bank’s commitment to extend support for wCBDC in the Helvetia Pilot for a minimum of two additional years.”

SDX is also working on blockchain-based solutions to support instrument fractionalization, tokenization of real world assets, and collateral mobilization.

“We expect to see the deployment of the first use cases next year,” he added. “Participants in Switzerland will be able to avail themselves of those services via a trusted, reliable and operationally efficient way, through a regulated FMI providing a blockchain-based infrastructure.”