Yesterday Fnality, the wholesale DLT payment infrastructure, announced the execution of pilot transactions for margin payments on its platform for the first time. Fnality is backed by more than 20 global institutions, and three of them took part in the live trial, Lloyds, Santander and UBS.
Fnality UK holds an omnibus bank account at the Bank of England, with tokenized central bank money used to execute institutional payments. While Fnality technically launched at the end of last year, it has to get regulator approval for new applications and scaling.
The payments firm gained its first central bank approval in the UK but has ambitions to support payments in US dollars, Euros, and several other currencies.
In this case these were uncleared bilateral margin payments. The use of DLT for intraday margin settlement is a popular use case in trials, although some of the focus has been on using tokenized collateral rather than cash. The notional size of exposures in OTC derivatives markets for FX, interest rates and equity totals $667 trillion, hence the importance of intraday margins.
“Another first for Fnality – this time in establishing the key proof point that the system can be used functionally for margin payments, a key component of the future of automation of a bank’s balance sheet,” said John Whelan, Managing Director of Digital Assets at Banco Santander.
Adhara, Fnality’s technology partner, has also developed the MarginBloc solution and conducted simulations in parallel with the pilot transactions. It’s a workflow solution that is run by a central counterparty (CCP) and can use multiple currencies, aiming to support cleared and uncleared margin requirements. Settlement can be routed via Fnality or elsewhere.
Fnality’s future plans
Fnality says it’s exploring using its payment system for cleared margin payments, subject to regulatory analysis. Similar regulatory debates are going on in other jurisdictions. The CFTC markets advisory committee is proposing that DLT-based collateral be accepted in the United States. A SocGen FORGE executive recently bemoaned the exclusion of derivatives from the EU’s DLT Pilot Regime.
One of the other solutions Fnality is working on is repo. Subject to regulatory approval, Fnality is partnering with tokenized collateral firm HQLAᵡ to settle repo transactions on the Eurex Repo F7 system.
Fnality and tokenized deposit designs
Fnality isn’t really your typical tokenized deposit because it’s based on a shared or omnibus bank account. A key advantage of Fnality’s tokenized cash is it’s the next best thing to a wholesale CBDC, although the Bank of England now plans to explore one.
To reap the full benefits of Fnality, the addition of other currencies would be ideal. Before its incorporation in 2019, the concept was known as the Utility Settlement Coin (USC). So it took over four years to get regulatory approval, or seven years including the USC phase. Getting central bank approval is not easy, to say the least. One of the topics explored in the Ledger Insights Research report on tokenized deposits, bank stablecoins and DLT payments is the potential paths to fast track institutional coins in other currencies.
Update: corrected that MarginBloc is run by the CCP
