Commerzbank and Deutsche Boerse have successfully used distributed ledger technology (DLT) to execute a legally binding settlement of a repo transaction.
The prototype transaction was based on delivery versus payment and was executed as part of a joint proof-of-concept examining the possible use of blockchain technology in securities settlement.
DLT creates an immediate and simultaneous transfer of assets so that the transaction can be settled in real time, leading to reduced counterparty risk and the corresponding reduction of capital costs.
The success represents the first repo transaction based on delivery versus payment using DLT.
The transaction comes almost a year after a Canadian-led consortium successfully demonstrated the instantaneous clearing and settlement of securities using DLT.
For Commerzbank and Deutsche Boerse’s transaction, digital tokens were generated for both commercial bank money and securities.
Ledger technology was then used to execute the simultaneous swap of the tokens as a legally binding transaction.
Deutsche Boerse acted as the cash provider, Commerzbank as the borrower and main incubator, and Commerzbank’s research and development (R&D) unit acted as the blockchain platform operator.
“In past pilots we have focused on new issue projects; with the transaction between Deutsche Boerse and Commerzbank we were now for the first time able to convert existing securities into digital tokens,” said Michael Spitz, CEO of the R&D unit of the Commerzbank Group.
“We are delighted to support the transaction as a platform operator and, together with Deutsche Boerse, to have reached such an important milestone in the adaptation of this future technology for the capital market.”
Since the emergence of DLT, settlement has been touted as being primed for blockchain intervention and significantly reducing costs and failures.
In August 2018, Juniper Research found that banks would be able to reduce costs on cross-border settlement transactions by more than 11% per on-chain transaction, saving them up to $27 billion by the end of 2030.
Back in 2016, Deutsche Boerse and Deutsche Bundesbank teamed up to launch a functional blockchain prototype for the settlement of securities.
Blockchain start-up Paxos has successfully raised $65 million from a series B round of funding, as it looks to accelerate the pace to build a new settlement platform for financial institutions.
However, opinions vary on how the technology should be used for settlement. A report produced by the Financial Industry Regulatory Authority (FINRA) in the US in 2017 indicated that difficulties may arise with the application of DLT to settlement.
The report suggested that under a DLT-based infrastructure, clearing and settlement of securities transactions may occur outside of traditional infrastructure leading to a potentially unclear distinction between trade execution and settlement.