Collateral mobility is among the top recognized prospects for deployment of distributed ledger technology (DLT) in securities financing. Ahead of Finadium’s Rates & Repo conference, we speak with our panelist experts from EquiLend and Eurex about what can be learned about on chain transactions from securities lending as well as which developments are in play and gaining traction.
In securities lending, different counterparts are recording their transactions to different ledgers, but a DLT, among its characteristics, has shared data that eliminates reconciliations. This means that data and processes related to contract values, collateral, accruals, and settlement instructions, for example, are matched at all times. This, explained Gary Klahr, director of Strategic Initiatives at EquiLend, leads to faster settlement as well as more efficient resourcing and accurate P&L.
Klahr is spearheading the development of EquiLend’s 1Source, which is set to go live in Q3 2024 for North American equities. The team has recently completed a contract initiation pilot in a test environment with five DLT working group members. While the platform is specific to securities lending, there’s a lot of post-execution overlap because ultimately, transactions can be boiled down to “asset versus collateral”, he noted.
To take advantage of DLT, the market needs a single source of truth as an anchor, said Klahr: currently, lifecycle management gives room for one-sided contractual changes that cause breaks, which won’t happen if data are aligned on a shared ledger.
All this has echoes of the overall automation story, but is DLT the same? That depends on how you define automation, he said. Where counterparts agree a contract over the phone, for example, and 1Source will extract agreement data and ensure that contract details are in line before it hits the ledger. In other words, transactions are not recorded until all parameters are matched.
Moreover, accelerated settlement has become a major and closely watched market development for equities, in part because of the knock-on effects for recalls and need to automate processes to make them happen on T+1. The fastest way to get recall messages out is on chain, he noted: “For a whole host of reasons (DLT) will automate a lot of the processes that are currently manual and will allow for much more efficient operational processing, while keeping all that shared data in line with both sides.”
Product traction
Currently, one of the most propagated use cases is intraday repo liquidity, said Frank Odendall, head of Securities Financing Product & Business Development at Eurex. Eurex intersects with DLT initiatives as part of Deutsche Boerse’s digital issuance platform D7 and via Eurex Repo providing the trading layer for HQLAX, which at this stage is a seclending product with the intentions to build out.
“We have to start somewhere, and the use cases so far have been focused on the bilateral market, with the ambition that this will have some use cases for the CCP environment as well,” he said.
To a large extent, existing centrally cleared securities infrastructures are already handling many trades on T+1, even T+0, but there’s always room for improvement, Odendall added: “In Eurex Repo, we already provide trade entry services and whilst a lot of noise has been made about the settlement layer, I think you have to automate it from trading to clearing to settlement.”
Over the coming year, he expects a proliferation of private sector initiatives – like Onyx and DLR (distributed ledger repo) — as well as the EU’s DLT Pilot Regime to start producing results, and it’s generally recognized that Europe has a bigger hurdle due to its dozens of central securities depositories and fragmented local market infrastructure. The key test for repo on chain, he noted, will be handling wholesale-level scale transaction volumes.
Gary and Frank will be joining colleagues from Finteum, HQLAX, J.P. Morgan, and the MIT Media Lab’s Digital Currency Initiative on the panel “Repo on chain and collateral mobilization” at Rates and Repo North America, where they will discuss these and other major implications of DLT for repo and collateral. Rates & Repo is a conference for cash investors, dealers, market intermediaries, technology firms and other service providers. Register here for the in-person panel discussions on November 2.