Banco Santander, Lloyds Banking Group, and UBS have completed the first uncleared bilateral margin payments using a digital representation of central bank funds on the Sterling Fnality Payment System (£FnPS). The transactions were executed within the parameters set by the Bank of England for Fnality’s initial stage of operations and used funds held directly in the £FnPS, signaling their future acceptance as collateral between counterparties.
This real-world proof-of-concept proves that Fnality can be used to make bilateral margin payments using the £FnPS, and marks the first instance of a fully regulated Distributed Ledger Technology (DLT)-based payment system being used to settle margin for the purposes of real-world inter-bank derivative exposures.
These settled margin transfers are a first step in exploring the potential use of £FnPS for cleared margin payments in the future, which is expected to ultimately enable significant balance sheet benefits for banks.
Concurrent with the pilot transactions in the live £FnPS environment, Adhara also simulated this transaction flow in a testing environment to explore how its MarginBloc technology could provide further efficiencies and unlock new options for intraday margining processes in the future.
John Whelan, managing director of Digital Assets at Banco Santander, said in a statement: “Another first for Fnality – this time in establishing the key proof point that the system can be used functionally for margin payments, a key component of the future of automation of a bank’s balance sheet.”
Peter Left, head of Digital and Markets Innovation at Lloyds Banking Group, said in a statement: “This live first usage of £FnPS to settle margin for the purposes of exposure reduction on inter-bank derivative transactions shows great promise. We are excited to see new functions develop allowing greater automation of the margining workflow reducing counterparty exposures across the industry.”
Hyder Jaffrey, head of Principal Investments & Strategic Ventures at UBS, said in a statement: “The transactions are a significant first step in showing the acceptance of funds held directly in the FnPS as acceptable collateral for discharging uncleared margin payments – and a great preview of what is to come.”
Angus Fletcher, CEO at Fnality UK, said in a statement: “This milestone demonstrates the first step in our exploration for a fully regulated DLT-based payment system being used to settle margin for cleared derivative transactions, allowing us to further demonstrate positive progress. The benefits that our system brings are evident, and we’re glad to have worked with Banco Santander, Lloyds, UBS and Adhara to show the usability of our £FnPS. With this, we continue to build up to our vision for a network of FnPSs.”
Edward Budd, co-founder of Adhara, said in a statement: “Managing these margin payments for uncleared transactions has allowed us to see first-hand the benefits that can be brought to participants. Once margin payments for cleared transactions are enabled, our MarginBloc solution will provide a consistent solution across the market to streamline the use of digital cash assets among treasurers, operations, and bilateral counterparts. ”