Commerzbank and German stock exchange operator Deutsche Boerse (DB) have for the first time successfully used distributed ledger technology (DLT) to complete a legally binding settlement of a repo (short for ‘repurchase’) transaction.
Banks often use repo transactions as secured money market instruments to cover short-term liquidity needs by depositing securities. In a press release (Mar 6), DB said the prototype transaction was conducted as part of a proof-of-concept (PoC) feasibility study exploring the opportunities offered by blockchain technologies in securities processing.
The PoC involved a repo transaction where banks that typically require short term cash borrow it by selling securities which act as collateral and agree to repurchase them in the near future. The repo transaction was based on a EUR 10 million ($11.3 million) bond by KfW Bankengruppe for a period of 7 days with -0.5% interest rate.
For the transaction, digital tokens were generated for both commercial bank money and securities which were exchanged simultaneously over a DLT platform operated by Commerzbank’s research and development (R&D) unit. DB was the cash provider, while Commerzbank played the borrower and main incubator.
According to Commerzbank, DLT creates a legally-binding, efficient, and transparent movement of tokenized securities and cash over the blockchain in real time, leading to reduced counterparty risks, and a corresponding reduction of capital costs.
“With the consistent development of blockchain technology, DLT is becoming increasingly important for a growing market. Now that we have dedicated ourselves to past pilots for new issue projects, we were able to convert existing securities into digital tokens for the first time with the transaction between Deutsche Börse and Commerzbank,” said Michael F. Spitz, CEO of Commerzbank’s R&D.
DB’s press release added that the results of the prototype transaction can serve as a basis for further developments. It seems the next steps as closely linked to the creation of a legal framework, which is a prerequisite for a binding assessment of contractual relationships.
According to Cointelegraph, DB has separately revealed it is “making significant progress” on its blockchain-based securities lending platform co-developed by HQLAx from Luxembourg. Currently, six banks are known to have confirmed joining the platform, which runs on Corda by R3.
Back in February, Commerzbank also tried a money market securities transaction using Corda in cooperation with Continental and Siemens.