Source: www.ledgerinsights.com
Today it was announced that blockchain settlement platform Fnality and DLT collateral management solution HQLAᵡ have tested a repo transaction with Banco Santander, Goldman Sachs, and UBS. Banks use repurchase operations (repos) to ensure they have the right amount of liquidity, but settlement usually takes two days. Enabling fast settlement with on-chain money and collateral means that intraday repo transactions can be supported by multiple banks.
Fnality, backed by 17 major financial institutions including Santander and UBS, will use central bank money-backed settlement tokens when it launches next year. Therefore, the proof of concept involved a simulation. By using cash on the ledger, Fnality reduces risk by speeding up payment and removing the risk of money from commercial banks. It has already been recognized as a systemically important payment system in the UK.
The collateral remained in the HQLAᵡ platform for the transaction and the money remained in Fnality. What changed was who owned the collateral and the money on each platform. But the key is to enable delivery versus payment (DvP), so transactions on each distributed ledger need to happen simultaneously and atomically.
“It’s great to see proven evidence of interoperability between Fnality and HQLAᵡ,” said Hyder Jaffrey, Head of Principal Investments and Digital Assets, UBS Investment Bank.. “Cross-chain DvP, enabling a digital repository, is critical in the broader delivery of a functioning digital asset marketplace.” Jaffrey was one of the driving forces behind the release of the Utility Settlement Coin, which became Fnality.
Fnality uses an enterprise version of the Ethereum blockchain and HQLAᵡ uses R3’s Corda enterprise blockchain, so the transaction is a cross-chain with different technologies. Adhara is the technology partner of Fnality and the Enterprise Ethereum Alliance (EEA) standard was used for cross-chain transactions. This is Fnality’s third cross-chain test after simulating the settlement of a bond issue with Natwest, Santander and Nivaura, as well as trading with intraday forex trading platform Finteum, which also runs on Corda.
HQLAᵡ runs a digital collateral registry that effectively locks up securities in custodian and digitizes them, allowing digital securities to be traded in real time rather than waiting for a two-day settlement.
Most HQLAᵡ transactions involve swaps, banks exchanging one type of security for another (delivery versus delivery) to ensure their balance sheets maintain the correct mix of liquidity for compliance purposes. By enabling chain settlement, as in this case, HQLAᵡ can support delivery against payment. In fact, HQLAᵡ and Fnality have discussed working together for years, and HQLAᵡ will go into production in 2019.
Goldman Sachs is an investor in HQLAᵡ, which is also backed by several other big banks, including JP Morgan, BNY Mellon, Citi and BNP Paribas.
Meanwhile, this is not the first intraday repo Goldman Sachs has been involved in. It participates in the blockchain intraday repo solution managed by JP Morgan, which uses tokenized commercial bank balances for settlement. Broadridge also operates a DLT intraday repo platform and Finteum plans to launch one next year.
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