Future of Finance


For HQLAx tri-party repo is the point of departure not the destination

For HQLAx tri-party repo is the point of departure not the destination

HQLAx is a properly funded start-up using the R3 Corda variant of blockchain technology to improve the ability of banks to mobilise eligible collateral, wherever it is, by tokenising assets while leaving them exactly where they are.

Users expect the service to yield massive benefits in capital and liquidity savings as well as lower operational costs, but the stated aim of the venture – “frictionless ownership transfers of assets” – is capable of extension far beyond the starting-point. Future of Finance co-founder Dominic Hobson spoke with Tilman Fechter, a Member of the Executive Board and Head of Banking, Funding and Financing at Clearstream Banking and also a member of the Board of HQLAx, and Nick Short, chief operating officer (COO) at HQLAx, about the short and long term ambitions of the business.

Questions that are being asked

  1. The clue is in the name: HQLA-x. Is the mission, basically, to run a securities lending/swapping service to help investment banks meet regulatory-driven (Capital Ratio, NSFR, LCR) demands to post HQLA as collateral through collateral upgrade trades?
  2. USING DLT BLOCKCVAN HQLA-x operates without the collateral having to move, because it tokenizes (none of your material uses this word) assets in custody puts them into “baskets” and stores who owns what in a ledger all parties can view. Is that right and, if so or if not, (a) how does it work in practice and (b) why does it satisfy regulations?
  3. Is HQLA-x hosting the “nodes” for the users (as other blockchain based projects such as those launched by ASX and CLS do) or are users managing their nodes themselves?
  4. How does HQLA-x improve on the collateral management arrangements set up by, say, BNP Paribas and Citi with Clearstream and Euroclear back in 2013?
  5. HQLA-x promises to make it easier to mobilise collateral in custody at tri-party agents and custodians – why no mention of CSDs (or ICSDs) as custodians of HQLAs?
  6. Is the HQLA-x business model capable of extension beyond HQLAs to other asset classes (including, for example, crypto-currencies)?
  7. The business case for using HQLA-x services includes operational savings but is built mainly on liquidity savings (no cash payments) and capital (no credit consumption) savings: you have put “excess” HQLA held by Tier 1 banks alone at €3.65 trillion, costing them €3.65 billion a year. How are those savings captured by users?
  8. The fact that collateral moves intra-day “at precise moments” is an unexpected refinement. How great is the demand for intra-day collateral management and what is driving that demand (e. g. liquidity and capital savings)?
  9. Am I right to understand that the advantage of “atomic delivery versus delivery (DvD)” of collateral baskets lie in not having to deliver securities either free of payment (creating credit risk) or against payment (creating liquidity costs)? If so, is this “swap” technique capable of extension beyond collateral upgrade trades?
  10. Will it ever make sense to offer delivery versus payment (DvP) as well as DvD services? If so, will central bank digital currencies (CBDCs) be helpful?
  11. The core product at the moment is collateral mobility to cover collateral upgrade trades. Are there plans to expand into other activities that generate borrowing or collateral needs (e.g. short-selling or margin payments to CCPs or non-cleared trades with OTC derivative counterparties)?
  12. Is there any theoretical limit to the idea of “frictionless ownership transfers of assets”?
  13. Network effects are presumably important to success. What progress have you made in attracting users from the supply (e.g. custodian banks as agent lenders) and the demand (e.g. investment banks) sides of the marketplace?
  14. How many users do you have live on the service now (apart from the founding/funding members)?
  15. What are the main obstacles to using the service that you have encountered (e. g. the cost of interfaces, legacy technologies, legacy ways of doing things) and how are you overcoming them?
  16. What strategies for distributing the service are you pursuing apart from approaching potential users directly?
  17. Will inter-operability with other networks (both traditional and blockchain-based) require agreement or data standards?
  18. The target market is Europe. Are there plans to address other (geographical) markets?
  19. Does the continuing value of HQLA-x services depend on the persistence of siloed securities holding and settlement systems?
  20. You are using DLT technology supplied by R3. Is that to overcome the problems of speed and scale posed by conventional blockchain technology? If so, do you lose any benefits as a result?
  21. You allude to HQLA-x being used to deliver regulatory transparency. Is this a reference to SFTR reporting?
  22. HQLA-x began as a project with Deutsche Börse but has become a collaborative project. Why was that necessary?