Deutsche Börse and HQLAx have 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 S.A. 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 HQLAx operating model and was built on Corda Enterprise, the commercial distribution of R3’s blockchain platform.
“The go-live of the HQLAx operating model demonstrates the power of innovation that DLT is already bringing to the financial services industry,” said Jens Hachmeister, head of New Markets at Deutsche Börse. “It proves how new technology can successfully be combined with trusted market infrastructure - and the positive reception of the model in the market speaks for itself. We look forward to continuing our fruitful collaboration with HQLAx.”
Commerzbank, Credit Suisse and UBS have been working with HQLAx since the start of this digital transformation initiative. “HQLAx have come a very long way in a relatively short period of time,” said Guido Stroemer, CEO of HQLAX. “The launch of our production platform is the culmination of strong collaboration, not only with our strategic partner Deutsche Börse, but also with R3 and several global banks with which we began our journey less than three years ago in an R3 lab. Our mission statement from the very beginning has been to deliver solutions for specific pain points in the market, and so we worked very closely with a core group of banks to deliver an operating model that was designed by the market, for the market.”
In addition to the three banks mentioned, over 15 market participants, including CIBC, Citi, Goldman Sachs and ING, are currently engaged in different phases of onboarding to the HQLAx platform. Meanwhile, J.P. Morgan is in the process of becoming the third tri-party agent in the HQLAx operating model, alongside Clearstream Banking and Euroclear Bank. This will add another important custody/collateral location to the solution, further increasing collateral mobilisation efficiencies for participants. Earlier this year, Deutsche Börse also acquired a third tranche of shares in HQLAx.
The HQLAx operating model is designed to enable more efficient collateral management of high-quality liquid assets (HQLA) - which are in heightened demand under Basel III regulations - and it allows market participants to connect to the platform via existing, 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.
Continuing with a guiding principle of leveraging feedback from market participants to deliver valuable use cases, HQLAx and Deutsche Börse are already developing further functional enhancements and additional business features, including digital collateral record re-use, intraday trades, delivery-versus-payment (DVP) trades and support for various types of pledges.
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