Goldman, Santander, UBS to trial blockchain repo settlement with Fnality, HQLAᵡ – Ledger Insights

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 agreements (repos) to ensure they have the right liquidity, but settlement usually takes two days. Enabling rapid on-chain cash and collateral settlement 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. Therefore, the proof of concept involved a simulation. By using cash on the ledger, Fnality reduces risk by speeding up payment and de-risking commercial bank money. It has already been recognized as a systemically important payment system in the UK.

The security remained on the HQLAᵡ platform for the transaction and the money remained on Fnality. What changed was who owned the security and money on each platform. But the key is to enable delivery-for-payment (DvP), so the transactions on each distributed ledger must happen 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 essential in the wider delivery of a functioning market for digital assets.” 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 that 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 attempt after simulating the settlement of a bond issue with Natwest, Santander and Nivaura, as well as transactions with intraday FX swap platform Finteum which also runs on Corda.

HQLAᵡ operates a digital security registry that effectively locks securities at the custodian and digitizes them, allowing the digital securities to be exchanged in real-time instead of waiting for two-day settlement.

Most HQLAᵡ transactions involve swaps, banks exchanging one type of collateral for another (delivery for 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 been discussing collaboration for years, and HQLAᵡ is set to go into production in 2019.

Goldman Sachs is an investor in HQLAᵡ, which is also backed by several other major banks, including JP Morgan, BNY Mellon, Citi and BNP Paribas.

Meanwhile, this is not the first intraday repo Goldman Sachs has been involved in. It is participating 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.