Fnality, the firm developing regulated distributed ledger-based wholesale payment systems, and HQLAx, the fintech developing DLT for securities finance and repos, are aiming to launch cross-chain intraday repo settlement this year after completing testing.

A repo trade was submitted in Eurex’s F7 web-based trading system. Collateral was earmarked on HQLAx and cash was earmarked on the sterling Fnality Payment System TestNet, allowing atomic settlement – simultaneous release of cash and securities at a predetermined time, once all the relevant conditions have been met. Execution was fully automated and programmed using smart contracts and settlement was via straight-through-processing, removing manual processes and increasing efficiency.

Richard Glen, solutions architect at HQLAx, told Markets Media that the test worked across the Fnality Payment System and the HQLAᵡ digital collateral registry, which bridged the DLT of Enterprise Ethereum and R3’s Corda platform. Digital collateral records allow the simultaneous transfer of loans and triparty collateral on delivery versus delivery (DvD) basis via the HQLAᵡ distributed ledger. This reduces intraday credit and collateral risk while also executing securities lending trades more efficiently.

“In principle, we are testing interoperability standards and bringing different chains together,” Glen added. “We aim to expand the universe by promoting interoperability.”

Kate Karimson, chief commercial officer at R3, said in an email to Markets Media that HQLAx has achieved a significant milestone for DLT .

“Interoperability is crucial for DLT to achieve widespread adoption in capital markets, and this demonstrates that R3’s Corda platform can successfully connect to Enterprise Ethereum, facilitating seamless cross-chain settlement,” added Karimson. “At R3, we’ve long advocated that interoperability is the key to unlocking the true potential of digital solutions.”

HQLAx and Fnality plan to launch wholesale cross-chain repo transactions in the fourth quarter of this year in the UK, subject to regulatory approval.

Another intraday repo platform that is already live is Broadridge Financial Solutions’ distributed ledger repo (DLR) platform, which launched in 2021 to offer clients intra-day, overnight and term repo capabilities. DLR currently processes over $1 trillion per month in notional value across multiple use cases for eight entities according to Broadridge.

On DLR the cash leg was settled using traditional finance payment rails, which is slower than the instantaneous, or atomic, settlement that is possible on-chain. However, in April this year Broadridge said it is incorporating JP Morgan’s JPM Coin as a digital cash alternative to provide digital atomic settlement for both the cash and securities legs of a repo. JP Morgan’s Onyx Digital Assets business also offers intraday repo.

Simone Cortese, director of product management at Fnality International, argued that the firm has a differentiator as it has developed DLT-based wholesale payment systems, known as Fnality Payment System (FnPS), which are supervised by the respective central bank in each jurisdiction.

In December last year the sterling FnPS, which is recognised by HM Treasury as a systemically important payment system, became the first holder of a Bank of England omnibus account and began controlled live payments. Fnailty said it became the world’s first regulated DLT-based wholesale payment system settling in digital central bank funds. Therefore, the credit quality of central bank funds underlie the settlement balances.

Cortese told Markets Media: “Money sits in an omnibus account and allows participants to transfer balances which is a unique value proposition from a risk perspective.”

He added that Fnality is aiming to receive regulatory approval in other jurisdictions, including the United States. He said: “There are a range of use cases being discussed.”

Collateral mobility

Glen said that the execution of intra-day repos can be programmed to the minute. As a result, the testing paves the way for precise control and an increase in the mobility of liquidity and collateral.

HQLAᵡ was originally created to focus on increasing efficiency in securities finance but Glen added that there has been wider interest in its delivery vs delivery abilities and  the opportunity to expand the offering across chains.

“We initially focussed on representing ownership of existing securities digitally on a ledger, rather than creating digital assets but that is the obvious direction of travel,” Glen said. “As people get more comfortable with the technology, the world is our oyster.”

In April this year HQLAᵡ  closed a Series C strategic investment round led by HSBC, with contribution from existing shareholders including BNP Paribas, BNY Mellon, Citigroup, Deutsche Börse Group, Goldman Sachs and JP Morgan.

Jamie Anderson, head of collateral treasury trading at HSBC, said in a statement: “Digital asset innovation is accelerating at pace around the world, which is why I’m looking forward to working closely with HQLAX to enable us to collaboratively build on our strengths as partners, and to optimise liquidity management and collateral management activities.”

In June this year HQLAᵡ said in a statement that BNY Mellon, Goldman Sachs and HSBC  passed €1bn in notional in outstanding agency securities lending delivery vs delivery transactions using the fintech’s  DLT platform.

Amar Amlani, head of EMEA digital assets at Goldman Sachs, said in a statement at the time: “We are no doubt still in the early stages of adoption and there are a number of additional benefits and efficiency gains to be derived – we are looking forward to continuing working with HQLAᵡ  our clients and counterparts to scale balances along with expanding applications of DLT across products.”

Broadridge expects to make other broadly adopted cash-on-chain alternatives available on DLR, in addition to JPM Coin, and the bank also anticipates making JPM Coin available as a settlement option for transactions on other platforms.

JP Morgan’s Onyx Digital Assets platform has native blockchain capabilities for both cash on ledger with the JPM Coin System and the tokenization of assets, in which assets are represented digitally on chain, and can be programmed using smart contracts. Nelli Zaltsman, head of platform settlement solutions, Onyx by J.P. Morgan, said in an email to Markets Media in April that the bank has uniquely able to support capital markets use cases with both assets and cash on the same ledger – first with intraday repo, and more recently with the issuance of municipal bonds.

She continued that these use cases highlight the benefits of having a payment leg that matches the speed and transparency of tokenized assets being settled – reducing settlement risk through atomic settlement, as well as allowing precise use of funds down to the minute, reducing the cost of capital. The bank is already exploring the use of digital assets as collateral and believes the capabilities are there.

“This will continue to improve over time as the industry finds increased paths to interoperability,” said Zaltsman.

For example, BlackRock and Franklin Templeton have launched tokenized money market funds, which could eventually be able to be used as collateral.

“Last year, we facilitated the tokenization of BlackRock MMF shares for this purpose on the Onyx Digital Assets platform through our Tokenized Collateral Network application, and we continue to explore such use cases,” added Zaltsman.