Earlier this month, the Hong Kong Monetary Authority (HKMA) issued the largest digital bond to date, a four currency green bond equivalent of around US$756 million. Now HSBC and the Bank of East Asia used the bond as collateral for a repo transaction. That involves one bank selling the bond to another in exchange for cash as short term finance. Later the bond is repurchased (repo) at a slightly higher price.
For the issuance, Hong Kong’s Central Moneymarkets Unit (CMU) was the central securities depository (CSD), and integrated with the HSBC Orion blockchain solution. Hence, the collateral from the same blockchain was used for the repo transaction.
“The four digital bonds – recently issued by the Hong Kong government on HSBC Orion as part of the CMU’s infrastructure – have seen unprecedented investor demand, secondary trading, and now repo trading,” said John O’Neill, HSBC global head of digital assets strategy.
“Digital bonds should be as liquid as conventional bonds, and HSBC is proud to have been part of the first multi-currency digital bond transaction globally to achieve this standard.”
DLT repo novelty
The use of DLT-based bonds for repo is still relatively novel. Lugano’s digital bond was used as collateral for repo and elsewhere in Switzerland last year.
Late last year, three institutions conducted a cross broder repo trial as part of Singapore’s Project Guardian. They were UBS, DBS and SBI. It spanned three jurisdictions with a tokenized bond issue on a public blockchain used as collateral.
Apart from natively digital bonds, as in these examples, DLT is also used to drive multiple repo workflow solutions. The high profile ones are from Broadridge and JP Morgan.
In fact, HSBC is a participant in Broadridges’ Distributed Ledger Sponsored Repo solution.
