Deutsche Börse and Commerzbank have successfully executed the first legally binding repo transaction settlement using distributed ledger technology. The test transaction was part of a collaborative proof of concept initiative built on a delivery versus payment model to determine whether blockchain networks can be used in securities settlement.
The transaction was executed through the generation of tokens for both the securities (securities tokens) and the legal bank money (cash tokens). A blockchain network was used to complete the simultaneous exchange of the tokens to seal a legally-binding transaction. Deutsche Börse was the provider of the cash, Commerzbank was the main incubator and borrower, while its research unit was the operator of the blockchain platform. The partner banks collaborated to develop the technology and the underlying legal framework.
The transaction’s success is proof that a legally-binding, transparent and efficient flow of tokenized cash and securities on a distributed ledger or blockchain built on a ‘delivery versus payment’ framework is practicable. DLT allows the instantaneous and concurrent conveyance of assets, which makes it possible to settle transactions in real time.
The most important benefit of the reduced execution time is that it massively reduces the risk borne by counterparties, which correspondingly reduces the capital costs. DLT also allows the oversight authorities and regulators to be directly and transparently involved in such transactions.
The repo transaction executed mimics a public note issues by KfW Bank Group (ISIN DE000A2LQSP7) valued at €10 million with a 7-day maturity at an interest rate of -0.5%. Repos are money market instruments backed by collateral used by banks to meet their short-term liquidity needs using security deposits.
The CEO of main incubator at Commerzbank Group’s R&D unit, Michael F. Spitz said:
Through the systematic development of blockchain technology, DLT is increasingly gaining in importance for a growing market. In past pilots we have focused on new issue projects; with the transaction between Deutsche Börse and Commerzbank we were now for the first time able to convert existing securities into digital tokens. We are delighted to support the transaction as a platform operator and, together with Deutsche Börse, to have reached such an important milestone in the adaptation of this future technology for the capital market.
Deutsche Börse’s Head of DLT, Crypto Assets and New Market Structures, Jens Hachmeister stated:
The successful execution as part of the joint project motivates us to explore the efficiency of distributed ledger technology further. Our particular focus here is on the integrated payment function – cash on ledger – which we have successfully demonstrated. The development of different blockchain applications and setting new standards is a high priority for Deutsche Börse Group, and we will push ahead with this process in close exchange with partners, supervisory authorities and central banks.
The outcome of the test settlement can be used as the foundation for further research. The following steps are closely related to the formulation of underlying legal structures, which are necessary for the creation of legally binding contracts. The two banks believe they are pioneers in this nascent technology and their goal is to create foundations on which infrastructure for the financial markets can be developed.