Tokenized Securities Improve Collateral Mobility

The Deutsche Bundesbank and Deutsche Börse have presented the results of a concept study on the use of distributed ledger technology (DLT) in the area of collateral management. This study outlines that, in principle, DLT is capable of delivering further benefits in terms of the velocity and usability of collateral. The two institutions are thus continuing their successful cooperation in researching the capabilities offered by securities settlement based on DLT technology.

It's a BLOCKBASTER – our research with the @bundesbank on the capabilities of #DLT-based #collateralmanagement. https://t.co/3KyAkZJ5bj pic.twitter.com/UwS8V61nuC

— Deutsche Börse Group (@DeutscheBoerse) January 23, 2020

“From the perspective of the Deutsche Bundesbank, collateral management is fundamentally important for the operational management of monetary policy. DLT-based solutions for collateral management have the potential to increase efficiency in this area by improving the availability of collateral,” said Burkhard Balz, Executive Board member at the Deutsche Bundesbank.

“As a provider of financial market infrastructure, Deutsche Börse is actively evaluating the opportunities offered by DLT. It is our core belief that this new and evolving world of distributed networks is another field where institutionalised trust functions delivered by a neutral party remain key to successful market-wide adoption,” added Jens Hachmeister, Head of New Markets at Deutsche Börse.

Since the global financial crisis, the importance of collateral and of collateral management services has grown significantly on the back of regulatory requirements and increased risk aversion among market participants. The question of collateral possibly becoming scarce has attracted frequent debate. Improved collateral mobility is therefore a matter of interest not only for market participants and infrastructure providers, but also for central banks as the largest collateral takers.

Various initiatives are under way in the financial services industry and also in the central banking community to make appropriate collateral available “in the right place at the right time”. The study comes to the conclusion that DLT-based solutions have the potential to support this goal as tokenized securities and baskets substantially improve collateral mobility and unlock further efficiency gains. Still, DLT-based structures have to be embedded in the existing, highly integrated system landscape of the financial industry, and resilient legal frameworks need to be developed.

Specifically, the joint study elaborates on a model where:

– tokens representing underlying securities and specific related rights are introduced;
– collateral – a specific ISIN or a basket of securities – is mobilized via tokens without any movement in the underlying assets;
– a specific trust function is introduced which secures the interests of the token holder with regard to the physical securities in custody.

Deutsche Börse and the Deutsche Bundesbank have already successfully completed phases I and II of the joint project BLOCKBASTER (Blockchain based Settlement Technology Research) project. The two prototypes developed in this context and operating on the basis of blockchain technology support the settlement of securities transactions, payments, interest payments and repayments when a bond matures. The underlying technology used in the two prototypes appeared to be fundamentally suitable for the live operation of a financial market infrastructure.

Based on the results of the joint research so far, the Deutsche Bundesbank and Deutsche Börse intend to continue to work together in exploring the potential offered by distributed ledger technologies.

The detailed study, entitled “How can Collateral Management benefit from DLT”, is available here.

Source: Deutsche Börse