Deutsche Börse subsidiary Eurex Clearing has received a non objection letter from German regulator BaFin allowing it to use digital collateral recorded on the HQLAᵡ DLT platform for margin purposes. Hence, this allows institutions to meet margin requirements almost immediately, without the need to liquidate securities to raise cash. JP Morgan will be the first to pilot the solution, which will launch in the second quarter of this year.
Some have argued that this type of collateral mobility could have prevented the 2022 UK gilts crisis, when insurers had to stump up margin in the face of falling UK government bond (gilts) prices. Instead of posting more gilts as collateral – as they could with a solution such as HQLAᵡ – they had to post cash by selling the gilts, creating a downward price spiral. Hence, the key advantage of collateral mobility is the risk reduction as well as the speed and cost savings.
HQLAᵡ and collateral mobility
HQLAᵡ works by freezing collateral at custodians and creating a record in the DLT-based digital collateral registry. This allows the ownership of the collateral to be updated and transferred immediately, rather than waiting for two day settlement windows. Technically this is not tokenization.
The startup is backed by numerous systemically important banks including BNP Paribas, BNY, HSBC, JP Morgan and Goldman Sachs. Eurex owner, Deutsche Börse, was amongst the first investors and also plays a critical role as the trusted third party that sits between the custodians and the digital collateral registry.
The potential volumes are significant. Eurex manages a collateral pool of EUR 49 billion ($51bn) and clears trades valued at EUR 11 trillion ($11.5 tn) monthly.
“J.P. Morgan early on identified the benefits of using traditional assets in digital form to move cleared derivatives collateral and is pleased to see this regulatory milestone achieved,” said Helen Gordon, Global Head of Derivatives Clearing, JP Morgan. “We look forward to the next phase of implementation and realizing the risk and optimization benefits associated with improved collateral mobility for us and our clients.”
HQLAᵡ is also working with institutional tokenized cash firm Fnality to enable intraday repo on the Eurex Repo F7 system. Goldman Sachs recently took part in a similar intraday transaction on the same platform, but using the Bundesbank trigger solution as part of the recent ECB wholesale DLT settlement trials.
In the United States, a CFTC industry working group is proposing the use of tokenized collateral.
