Banks are putting the concept of securities lending on a blockchain-inspired platform to the test.
ING and Credit Suisse have executed the first live securities lending transaction on R3’s Corda distributed ledger in a move that could prove to critics that such technologies are not just hype. The two Wall Street firms swapped baskets of Dutch and German government securities worth 25 million euros.
The firms are using R3’s blockchainlike technology to solve a liquidity problem. As a result of Basel III, specifically the liquidity coverage ratio that requires larger capital reserves, many large banks have what they consider to be excess liquidity. One way institutions can manage that problem is by borrowing and lending of cash or securities.
Typically in securities lending, they are moved from one account to another. In a new approach built by HQLAx, however, digital collateral records are used to transfer ownership of baskets of securities, without having to move the underlying securities from one custodian to another.
In this collaboration with R3 and several banks, HQLAx’s digital collateral records are managed on R3’s distributed ledger, which has some features of a blockchain, but is private and permissioned, not open to the public as a blockchain would be. The law firm Clifford Chance also helped develop the legal architecture for transferring ownership of securities in this way.
The hope is that this technology could not only help market participants redistribute liquidity more effectively and more cost-efficiently, but also enhance regulatory transparency of collateral chains, and mitigate systemic risk by enabling orderly default unwinds.