New tokenised collateral system will make a ‘winner out of everyone’ as backers eye ambitious expansion

Tokenised collateral mobility system eyes expansion into cash and new regions ahead of market adoption at the end of the year

By Jon Watkins

A landmark collateral mobility system using tokenisation to reduce eye-watering costs of moving high quality liquid assets (HQLA) will hugely benefit custodians, banks and multiple other participants as the platform readies for use by the start of 2019.

HQLAx is a securities lending platform using R3’s blockchain technology, supported by Deutsche Boerse and already has the backing of six banks including Goldman Sachs, Credit Suisse and ING.

The initiative allows collateral to stay fixed with the legal entitlement moving and being held for safekeeping by a custodian.

Following a successful securities lending transaction on the platform at the start of March between Credit Suisse and ING, HQLAx is now looking ahead to the future with sights on receiving clients on the platform at the end of 2018, with actual use of the service likely taking place early next year.

Mobilising high quality liquid assets has become a huge burden and cost for the securities services industry, but those involved in HQLAx believe that by creating a token so that the securities don’t physically move themselves will solve widespread problems, along with creating a tradable new asset class.

CEO and founder of HQLAx, Guido Stroemer, said the solution will address the approximate €54 billion of costs currently associated with mobilising high-quality collateral, and an estimated excess of €2.7 trillion.

 “You have to ask yourself ‘why the banking industry is sitting on €2.7 trillion worth of excess HQLA at the cost of €13 billion?’,” said Stroemer, speaking at Sibos 2018 in Sydney. “It’s a function of a lack of collateral mobility, there’s trapped liquidity sitting in the markets looking for a more efficient way to be released and monetised.”

Ambitious growth plans

Stroemer added that the service would be targeting the top 100 banks and emphasised that having custodians onboard will be crucial.

Those involved in the initiative also pointed towards expansion beyond Europe, the implementation of cash on the platform and being able to interoperate with other platforms using DLT.

“You have a basket of HQLA and then you tokenise those, so you take them from its current form into a digital form and then you are able to actually hold that ownership, or partly own it,” said Mariana Gomez de la Villa, director, distributed ledger technology programme at ING.

“Once you actually own that asset, you make it liquid and that means you can make it tradable. It also makes you a market maker, so you can create new markets.”

Discussions in recent years were more around whether there would be a shortfall of high quality liquid assets to cover increasing collateral requirements, however that has now been replaced with concerns over mobility and costs.

“We see huge potential around the technology and the platform,” said Paolo Giuseppe Muzzarelli, managing director, Credit Suisse. “The benefits for operating in a highly liquid market: it’s a transparent one, it’s a fast one and it’s an efficient one, because you are not moving assets anymore.”

During the transaction in March, Credit Suisse and ING agreed to transfer legal ownership of Dutch and German government securities on the platform using HQLAx Digital Collateral Records (DCRs) while the underlying securities remained static within unique DCR-linked custody accounts held by Credit Suisse and ING.

The touted benefits of the system along with cost reduction and liquidity include enhancing regulatory transparency, mitigating systemic risk and helping financial institutions manage capital more efficiently.

Repo “has to come”

A major milestone for the project was the strategic partnership with Deutsche Boerse earlier this year. Under the agreement, Eurex will provide the repo trading application, while Deutsche Boerse will offer a post-trade processing layer which will interoperate with multiple collateral agents and custodians. 

Also speaking at Sibos, Gerd Hartung, vice president and functional head at Deutsche Boerse, said that in a year or two the group would look at ways to include cash into the construct.

“Short-term, we will be coming up with what we call an MVP, a minimum viable product, with the core elements of what clients need,” said Hartung. “Then in a year or two it will be important to look at ways to include cash into the construct.

“Repo is something that has to come at a certain point, so we have to look at how we perfect cash settlement on blockchain, off blockchain and what are the legal environments. Then I think the world is open to a certain extent because, we are talking about different transaction types and different asset classes.

“We are starting out in a European environment, but then we can think about other regions.”

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