Friday, September 28, 2018

Disrupters Fail to Move Needle with Securities Lending Solutions

Bank of England hosts DLT vendors for industry review

Author: Ed Blount

The Bank of England's Securities Lending Committee took up the question of distributed ledger technologies (DLT) in its September 24 meeting. Three vendors were invited to present their concepts to the group of nearly two dozen UK bankers and their regulators. The presentations and the Committee members' reactions were summarized in the minutes of the meeting. Each vendor approached the market from a different perspective, using a different aspect of DLT. Members found some value in the proposed solutions, yet were generally disappointed in the market impact of the innovative approaches.

  • HQLA allows traders to use a digital token to exchange a basket of collateral in an upgrade transaction. Transfer of the collateral is handled by a triparty custodian on a book entry basis. A test trade has taken place on the platform, said HQLA, serving as a proof of concept.
  • WeMatch embodies an algorithm on a trading platform for loans that connects lender and borrower. An agent lender remains an intermediary in the process, which purports to offer best execution on loan pricing.
  • TradingApps uses a shared ledger to simplify the settlement, billing and reporting for loans. The post-trade operational aspects are claimed to be more efficient without the current "disjointed and inefficient current processes" of securities lending.

The Committee minutes noted that none of the vendors were offering a product that would expand the market for securities lending, either by broadening the number of counterparties or by increasing the universe of lendable securities. Each solution is intended to "improve the efficiency of the existing operational aspects of the securities lending market.

Members agreed that distributed ledger technologies would likely become "important" across all financial markets, but that widespread adoption of a single vendor's solution could pose a "single point of failure" risk. However, members felt that the planned Securities Financing Trade Repository might benefit from the support of these new technologies.

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