Euro CP Trade Replicated On Blockchain
Commerzbank, KfW Banking Group and MEAG, the asset manager of Munich Re and ERGO, have jointly traded a Euro Commercial Paper (ECP) issued by KfW, and simultaneously replicated the transaction in a Blockchain. Blockchain or distributed ledger technologies build a decentralised data structure and found the basis for intelligent electronic contracts, so called “Smart Contracts”, which focus on the automated processing of business transactions. The security was sold to MEAG, and settled without a paying agent or a clearing system. This pilot transaction comprised a €100,000 issuance volume with a five-day term.
In parallel to issuance and settlement, key transaction elements were replicated and simulated by means of distributed ledger technology, using the R3 Corda platform. For this purpose, the standard number of required intermediaries was reduced, this allowed for an immediate posting. In parallel a real-time replication of the transaction was done using distributed ledger technology. Normally, securities settlement and related payments require two days, due to the restrictions imposed by clearing systems which necessitate deferred timing.
Since 2015, Commerzbank has been involved in an initiative launched by technology firm R3. This initiative explores applications for distributed ledger technologies in the financial services industry. Commerzbank had also, in cooperation with other banks and R3, developed an initial prototype of the Corda based platform. This pilot transaction, using a money market instrument, was realised via an extension of this application, which provides additional functionality. For instance, individual transaction steps can be made transparent through a real-time visualisation, which also provides a basis for a regulatory reporting.
Given their short terms and simple structures, money-market instruments qualify to issuance and trading using distributed ledger technology. With this pilot transaction, the institutions involved have now simultaneously simulated key elements of a real transaction with several counterparties via a Blockchain. Looking to the future, the option of immediate securities settlement may offer significant benefits. Firstly, a more streamlined transaction processes and a reduced number of intermediaries can offer efficiency gains. Secondly, a same day value date can reduce settlement risk, thus providing relief in terms of capital. As money-market instruments are usually traded in high volumes, a marked reduction in capital and liquidity costs can be expected. However, to fully realise these efficiency gains it will require further technical, regulatory and legal adjustments.
The development of the market readiness of the new platform will be gradually progressed over the coming years. A particular focus is on embedding distributed ledger technology in the regulatory framework, as well as adjustments with regards to the securities law. At the same time, this will involve further development of existing regulatory reporting interfaces.
“The pilot transaction has demonstrated that the issuing as well as the trading of securities can be simulated in real time via Blockchain technology. Transforming securities transactions into digital issues may open up significant potential for efficiency gains”, said Roman Schmidt, Commerzbank’s Divisional Board member for Corporate Finance.
Dr Frank Wellhöfer, Managing Director for Investment Controlling, Back Office and IT at MEAG, said: “This project has allowed us to analyse from an investor’s perspective the impact of blockchain technology on front and back-office processes, and regulatory aspects. The future belongs to digital business processes. The potential efficiency gains and cost benefits are already highly attractive when looking at existing processes; the opportunities offered by the further development of our processes promise additional revenues for our clients.”
“Advancing digitalisation will have a significant impact on the manner in which financial markets transactions will be traded and settled in the future. As a major player on the international money and capital markets, KfW believes that Blockchain technology holds significant potential. With this pilot transaction, we have been able to gather initial positive experience in practice. Looking forward, we anticipate benefits in terms of settlement speeds, transparency, and high security standards”, said Dr Frank Czichowski, Treasurer of KfW.
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