Today it was announced that blockchain settlement platform Fnality and DLT collateral management solution HQLAᵡ tested a repo transaction with Banco Santander, Goldman Sachs and UBS. Banks use repurchase transactions (repo) to ensure they have the appropriate amount of liquidity, but settlement usually takes two days. Enabling speedy settlement with on-chain money and collateral means that intraday repo transactions can be supported across multiple banks.
Fnality, backed by 17 major financial institutions, including Santander and UBS, will use settlement tokens backed by central bank money when it launches next year. Hence the proof of concept involved a simulation. By using cash on ledger, Fnality reduces risk by speeding up payment and removing the risk of commercial bank money. It has already been recognized as a systemically important payment system in the UK.
The collateral remained on the HQLAᵡ platform for the transaction, and the money stayed on Fnality. What changed was who owned the collateral and money on each platform. But the key is to enable delivery versus payment (DvP), so the transactions on each distributed ledger have to take place 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 Repo, is critical in the wider delivery of a functioning digital asset market.” Jaffrey was one of the driving forces behind the launch of the Utility Settlement Coin, which evolved into Fnality.
Fnality uses an enterprise version of the Ethereum blockchain and HQLAᵡ uses R3’s Corda enterprise blockchain so the transaction is cross-chain with different technologies. Adhara is the Fnality technology partner and the Enterprise Ethereum Alliance (EEA) standard for cross chain transactions was used. This is Fnality’s third cross-chain trial after simulating the settlement of a bond issuance with Natwest, Santander and Nivaura, as well as transactions with intraday FX swap platform Finteum which also runs on Corda.
HQLAᵡ runs a digital collateral registry that effectively locks securities at the custodian and digitizes them, enabling the digital securities to exchange in real-time rather than waiting for two day settlement.
Most HQLAᵡ transactions involve swaps, banks exchanging one kind of security for another (delivery v delivery) to ensure their balance sheets maintain the right mix of liquidity for compliance purposes. By enabling on-chain settlement, as in this case, HQLAᵡ can support delivery versus payment. In fact, HQLAᵡ and Fnality have discussed working together for years, with HQLAᵡ going into production in 2019.
Goldman Sachs is an investor in HQLAᵡ, which is also backed by several other large banks, including JP Morgan, BNY Mellon, Citi and BNP Paribas.
Meanwhile, this is not the first intraday repo that Goldman Sachs has been involved with. It participates in the blockchain intraday repo solution run 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.
