Deutsche Börse and HQLAᵡ successfully launched their jointly developed Distributed Ledger Technology (DLT) solution for frictionless collateral swaps in the securities lending market. The live transactions were executed by Commerzbank, Credit Suisse and UBS on the Eurex Repo F7-trading system.
As part of these transactions, ownership of a basket of German government bonds and a basket of corporate bonds was swapped between UBS and Commerzbank, both using Clearstream Banking as custodian. This was followed by a cross-custodian swap between UBS and Credit Suisse, in which ownership of a basket of corporate bonds at Clearstream Banking and a basket of German government bonds at Euroclear Bank was exchanged without the need for securities to be physically moved between the collateral agents. Instead, the change in ownership was recorded on the digital collateral registry, which is one of the four layers of the HQLAᵡ operating model and was built on Corda Enterprise, the commercial distribution of R3’s blockchain platform.
The successful launch of the platform is an important milestone for the implementation of DLT in the securities lending market. Jens Hachmeister, head of New Markets at Deutsche Börse, said in a statement: “It proves how new technology can successfully be combined with trusted market infrastructure.”
The HQLAᵡ operating model facilitates more efficient collateral management of high-quality liquid assets (HQLA) and it allows market participants to connect to the platform via existing, well-established interfaces. The digital collateral registry layer enables delivery-versus-delivery (DvD) ownership transfers of baskets of securities, eliminating the operationally onerous requirement to move securities across fragmented securities settlement systems. The other layers are the leading Eurex Repo F7-trading system where transactions are executed, the participating custodians/tri-party agents where the securities are deposited and the Deutsche Börse-owned Trusted Third Party (TTP) entity which connects the custodians/tri-party agents to the digital collateral registry.
Peter Schmidt, co-head, Repo Desk Treasury at Commerzbank, said in a statement, “HQLAᵡ delivers a fascinating approach to overcome the fragmented post-trading landscape. It enables treasury departments to manage their collateral pools more efficiently by significantly reducing the settlement cycle and avoiding resource-intensive collateral movements. It is a first but important step toward a new ecosystem where tokenized assets can be traded in a DLT environment.”
In addition to Commerzbank, Credit Suisse and UBS, over 15 market participants, including CIBC, Citi, Goldman Sachs and ING, are currently engaged in different phases of onboarding to the HQLAᵡ platform. Meanwhile, J.P. Morgan is in the process of becoming the third tri-party agent in the HQLAᵡ operating model, alongside Clearstream Banking and Euroclear Bank. This will add another important custody/collateral location to the solution, further increasing collateral mobilization efficiencies for participants. Earlier this year, Deutsche Börse also acquired a third tranche of shares in HQLAᵡ.