In a recent speech, Petra Tschudin, alternate member of the Swiss National Bank governing board, and Thomas Moser, member of the SNB governing board, discussed the Swiss repo market 25 years past as well as provided a view on the future.
In addition to the monetary policy of central banks and changing regulatory requirements, technological progress is also an important driver of this transformation. The focus here is often on increased settlement speed. Settlement could be accelerated by further developing or linking existing systems or by building new systems based on distributed ledger technology (DLT).
Innovation is currently particularly strong in the following three areas: delivery-versus-payment settlement, intraday liquidity management and collateral mobility. Delivery-versus-payment settlement reduces market participants’ settlement risk substantially, as the money and the securities are exchanged almost simultaneously. Today, the technical platform architecture of triparty agents (TPAs) enables this almost simultaneous exchange by means of coordinated settlement via separate but interconnected securities and payment systems. In the future, settlement efficiency could be improved further thanks to DLT, so that the transfer of the securities and the relevant payment takes place in a single, inseparable step.
If DLT becomes generally accepted for securities settlement in the future, it is important that central banks be prepared. As part of a pilot known as Project Helvetia III, the SNB has therefore explored how a repo transaction can be settled using token-based securities and wholesale central bank digital currency on a DLT-based platform. The repo transaction was conducted on SIX test systems. The transaction was initiated on the CO:RE trading platform, administered via the TPA and settled on SIX Digital Exchange (SDX).
The second area currently witnessing a lot of activity is intraday liquidity management. Financial institutions have become more interested in intraday repo transactions with maturities of a few hours. We also observe growing interest in the settlement of repo transactions at a specific time during the day, rather than at any given time on a value date, as is the usual practice. Such functionalities can be provided using conventional technologies as well as DLT-based solutions. These developments are interesting because they could influence the market over the long term by giving intraday liquidity an explicit price.
The third and final area with high potential for innovation is collateral mobility. The ability to move collateral efficiently between various central securities depositories, accounts and counterparties brings significant advantages: The pool of collateral available immediately can be expanded and obligations to deliver certain items of collateral can be met more effectively and accurately. Moreover, operational risk associated with the transfer of securities can be reduced.
A range of new technologies is being developed and approaches investigated to increase collateral mobility. For instance, the programmability of token-based collateral offers the possibility of automating processes such as the transfer and release of collateral. The SNB is open to these kinds of new technologies and developments and has run its own projects in this connection, such as the aforementioned pilot Project Helvetia III. Furthermore, the SNB also includes collateral issued on the platform of a DLT-based central securities depository such as SDX in the SNB GC Basket. Already today, a number of token-based bonds can be used for repo transactions, just like conventional collateral. These and other developments will change the repo markets in the future.