Securities Financing Technology News | IMN: Digital collateral tokens are a game changer for collateral markets

Technological developments in the digital assets space are opening up the possibility of digital collateral tokens that would transform collateral markets, said Darren Wilson, vice president of financing and collateral solutions, business development at State Street.

Wilson spoke during a panel entitled “The European Repo Market Outlook: Challenges and Opportunities for Investors and Repo Traders” at the IMN European Beneficial Owners’ Securities Finance & Collateral Management Conference in London.

Led by Andy Wiblin, GLMX’s Chief Product Officer, the panel discussed what opportunities lie ahead for the industry and how the industry can work towards a more efficient market.

Panel speakers included Morten Jacobsen, Head of Cash Management at Norges Bank Investment Management, Stuart Day, Director of Product Management at S&P Global Market Intelligence, and Jonathan Ford, Managing Director of the Central Funding Group at RBC Capital Markets.

RBC Capital Market’s Ford reflected on the 2022 repo market. He said: “It’s an interesting market out there. Anecdotally, I would say if you look at 2019 and only look at active traders and hedge funds, their US/World allocation was probably somewhere in the range of 80% US/North America, 20% Europe/Asia.

“That’s changed tremendously post COVID-19 where it’s probably 60/40 or 70/30 Europe/Asia. You can see it in the Treasury space, and you can see it in particular on the short side.”

Ford said he’s noticed a dynamic in the market where there isn’t necessarily a direct consumption or need for leverage, but there is second-order leverage in shorts because “if you have to borrow it, you have to borrow it, borrow it You must consume the balance sheet – either to borrow it or to provide collateral to the lenders you are borrowing it from. As a liquidity provider, Ford added that it would require balancing.

He also pointed out the opportunities in the market for the future. He expressed that there are a variety of things in the industry that need to be improved to simplify and accelerate the speed of collateral, including data and automation.

“On the data management side, in terms of the collateral matching programs and the collateral management providers, in terms of the legal side of the equation, there are so many parts of the business that are not efficient or can be further improved,” he said Ford explained.

The panel also highlighted that liquidity pools in repo markets are quite fragmented and not as developed as in other marketplaces.

However, State Street’s Wilson noted, “Technology can play an enabling role here, potentially connecting alternative liquidity pools and repo programs with a platform interface and providing greater connectivity between repo market participants, supporting price discovery and providing access to diverse sources of liquidity.” .”

Collateral velocity will increase as securities market settlement transitions from T+2 to T+1, and this will have a major impact on the trading process and operating models, Wilson explained. According to the panel, this will speed up collateral availability and enable shorter trade lifecycles.

Wilson concluded, “Thinking further into the future, technological developments in digital assets open up the possibility of digital collateral tokens that would enable real-time settlement of collateral obligations. This would be a game changer in collateral markets and could help facilitate interoperability of collateral held in different locations.”

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