The future of repo?
21 January 2025
As the use of blockchain and distributed ledger technology starts to make real footholds in the repo market, Karl Loomes looks at the technology and the potential benefits it brings
Image: stock.adobe.com/Guma
In the world of overhyped phrases and terminology everybody knows but nobody truly understands, blockchain and distributed ledger technology (DLT) have to be near the top in the financial industry of late. DLT, theorised as early as 1991, has itself existed for more than a decade 鈥� famously hitting the mainstream through the development of bitcoin. Its use in the repo market first saw pilot systems making headlines around 2016.
Just last month, Soci茅t茅 G茅n茅rale completed its first repo transaction in digital securities with a Eurosystem's central bank fully executed on blockchain, while Santander Corporate and Investment Banking (CIB) announced its first programmable intraday repo transactions with J.P. Morgan via Digital Financing on its blockchain-based Kinexys Digital Assets platform.
As overhyped as bitcoin and crypto currencies might make the term 鈥榖lockchain鈥�, the reason for such genuine interest, and such eager uptake of the technology, is that it does truly have a lot to offer. From increased liquidity to improved security, blockchain brings a wealth of benefits to repo participants.
What鈥檚 in a name?
Though the terms are often used interchangeably, blockchain is in fact a specific type of DLT. Put simply, blockchain is a public, centralised and immutable ledger that stores records across a peer-to-peer network. Each record, or 鈥榖lock鈥�, is stored in chronological order, and is linked to its predecessor in a digital 鈥榗hain鈥� 鈥� hence the name.
Being a centralised ledger, there is only the need for one record, which everybody has access to. As each block is immutable, no records can be tampered with or changed after they have been recorded. Any errors need to be corrected via a new, independent transaction.
Being a digital system, the blockchain is able to contain 鈥榮mart contracts鈥� 鈥� snippets of code that automatically execute an agreed action when specific conditions are met. These self-executing digital agreements help reduce the need for any intermediaries or manual processes and speed up virtually any aspect of a transaction.
New technology, established market
These broad, generic benefits are amplified when applied to repo transactions. As Ed Tyndale-Biscoe, head of Secured Funding at ION Markets, notes: 鈥淒istributed ledger technologies have the potential to be transformational in overhauling the repo market鈥檚 complex settlement and post-trade processes.鈥�
鈥淭he market has successfully issued numerous financial instruments on blockchain networks,鈥� highlights Johann Palychata, head of Partnerships and New Platforms, 麻豆传媒 Services, BNP Paribas, adding: 鈥淯sing them for refinancing purposes through repo is a natural use case. It was therefore only a matter of time for such usage to gain traction.鈥�
This positive note is mirrored by Horacio Barakat, head of Digital Innovation at Broadridge: 鈥淒istributed Ledger Repo is transforming repo market infrastructure. Via the utilisation of tokenisation and smart contracts, DLR allows for better collateral velocity, optimal liquidity management, reduced financing costs and operational risk.
鈥淒LR currently processes over US$1.5 trillion in notional every month in multiple types of repo transactions. Intraday repo is one example of one of the advancements that DLR is bringing to repo markets.鈥�
The centralised and immutable nature of blockchain transactions help bolster transparency and accountability 鈥� all parties involved can check and verify each stage of a transaction and the collateral involved, all in real-time. This potentially means increased confidence both in each transaction and in the market as a whole.
Similarly, the cryptographic security involved with a blockchain transaction, and the decentralised, peer-to-peer nature of DLT, inherently add another element of confidence and security for all participants.
The use of smart contracts means the terms of a repo agreement can be automatically enforced, reducing the potential for human error and the need for manual intervention. Pre-agreed smart contracts can enforce the transfer of collateral and payment terms with no room for argument.
Palychata notes: 鈥淏lockchain enables the digitisation of contracts and programmable money, hence automated transactions. It also accelerates the movements of collateral and the transfer of assets.鈥�
This automation means settlement times are reduced 鈥� to the point of making T+0 feasible with intraday settlement 鈥� while minimising the chance of settlement failure, and therefore reducing costs.
Tyndale-Biscoe expands: 鈥淚t can lower the costs associated with all forms of secured funding transactions and increase collateral fluidity by improving settlement efficiency 鈥� bringing the settlement cycle into a fully real-time model, increasing collateral visibility leading to a reassessment of liquidity management.鈥�
Smart contracts mean regulatory requirements can be adhered to automatically, reducing the risk of noncompliance, while the ability to monitor transactions in real-time, the immutable nature of blockchain, and the inherent 鈥榓udit trail鈥� available through the linear block-linked system, all result in greater regulator compliance and monitoring.
DLT reduces the need for intermediaries 鈥� such as agents, clearing houses and custodians 鈥� in a transaction, further reducing costs. The automation brought by smart contracts and reduction in the need for manual input, not only reduces the costs associated with errors and settlement failures, but also improves the efficiency of the repo process.
In addition, Tyndale-Biscoe suggests: 鈥淭he use of smart contracts can simplify the client onboarding process and simplify the post-trade lifecycle process. We also know it can open new options to market participants.鈥�
These benefits are already being actualised. Speaking of the work at Broadridge, Barakat says: 鈥淏y integrating smart contracts and tokenisation, we are enhancing operational efficiency and creating new opportunities for seamless transactions. Our focus on interoperability ensures that these advancements work harmoniously across various platforms, driving innovation and setting new standards for the future.鈥�
Bits and pieces
Blockchain and tokenisation go hand-in-hand, and in repo, the tokenisation of assets and collateral brings its own set of benefits. Tokenisation 鈥� breaking down underlying assets into smaller fractions, digitally tradable 鈥� can potentially open up a range of new assets as collateral, or enhance the ease and use of current asset classes. It also has the potential to make the transfer and trade of collateral across jurisdictions and markets easier.
Reducing the usual complexities associated with moving collateral across borders, as well as removing the need for intermediaries and enabling real-time tracking, allows for greater efficiency and collateral optimisation, as well as reducing costs.
Tokenised assets can also be traded 24/7 via DLT-based platforms. Combined with the potential lower barriers to entry that digitisation of assets brings, as well as the increased ability for global trading via blockchain without the need for central clearing houses, tokenisation and DLT can lead to increased trading and enhanced liquidity.
鈥淚t can lead to an increase in trading volumes since tokenised assets can be traded round the clock on DLT-based platforms, and enhance liquidity by democratising market participation, since tokenisation allows for fractional ownership,鈥� confirms Tyndale-Biscoe.
Up and coming
It is natural, then, that all these potential benefits are seeing the blockchain repo market grow rapidly. 鈥淭he use of DLT in repo, and securities lending markets is continually growing. We鈥檙e seeing platforms such as HQLAX and J.P. Morgan鈥檚 Onyx process billions in daily repo volumes already, and others claiming trillions in monthly volumes.
鈥淩ecently there are reports of fully-digitised securities, using central bank digital currency being traded end to end within the euro collateral trading environment,鈥� Tyndale-Biscoe emphasises.
There is, of course, still a fair way to go, and despite some systems seeing trillions in monthly volumes, the total number still lags far behind the traditional repo market. 鈥淲e are getting there,鈥� as Palychata puts it.
鈥淭echnical and functional layers are progressing fast, and this is a great collective achievement. We are seeing more and more transactions occurring between various counterparties,鈥� he highlights.
Naturally, this type of new technology and market apparatus takes time to disseminate more broadly, and certainly, the early signs (if they can still be considered such) seem to be positive. Liquidity will be essential.
Palychata notes: 鈥淧articularly in our industry, the benefits materialise only when a market or a venue reaches sufficient liquidity,鈥� adding: 鈥淭he next steps involve achieving a critical mass of liquidity in blockchain networks. We expect the key stakeholders of these blockchain initiatives to be aligned on this objective.鈥�
In the long run, there are also a number of potential hurdles the market will need to address. Interoperability between the various networks and platforms will be key. Palychata expands: 鈥淏uilding interoperability is essential, as multiple networks are expected to coexist. There might be scenarios where cash is on one network and securities on another, but this should not add friction to the trades.鈥�
Barakat confirms: 鈥淚nteroperability between platforms and with existing market infrastructure is critical for success. Once interoperability is achieved, it is pretty seamless to manage collateral and cash in a synchronous way and achieve atomic simultaneous digital settlement.鈥�
There are, however, already positive signs in this direction, Tyndale-Biscoe believes, saying: 鈥淚nteroperability and standardisation is needed across platforms and providers 鈥� though there are signs this is coming.鈥�
In a similar vein, and as is often the case across the global financial markets, any differences between the various regulatory and legal frameworks between countries, will seemingly act as a roadblock for a technology that is almost inherently global by nature.
鈥淒isparate regulatory and legal frameworks remain a key obstacle to wider implementation and adoption in physical settlement paradigms,鈥� Tyndale-Biscoe advises, adding: 鈥淛oined-up policymaking will be crucial as the use of blockchain for repo develops, as well as a willingness to work together.鈥�
He also notes: 鈥淗ow the traditional settlement model interacts with cryptocurrency markets and exchanges remains somewhat uncertain.鈥�
Addressing these issues will arguably be the driving force for DLT repo participants and platform providers for the foreseeable future. Again, almost by its nature, this technology, and the market it is helping facilitate, sseem likely to have those involved all 鈥榦n the same page鈥� when it comes to achieving these objectives.
Likewise, a continued 鈥榩roof of concept鈥� that successful use of DLT brings to the market, is likely to garner greater interest and adoption. Across the board, legacy systems are being replaced by newer, digitalised systems.
Palychata says: 鈥淪takeholders need to continue to prove to the market how the use of blockchain adds value. It is expected that further education about this new technology will complement the rising number of trades in the next 18 months.鈥�
As Tyndale-Biscoe concludes: 鈥淓fficient, globally interconnected securities markets demand digitalised settlement. It鈥檚 the case that evolution from physical to digital-based settlement is a question of when, not if.鈥�
Just last month, Soci茅t茅 G茅n茅rale completed its first repo transaction in digital securities with a Eurosystem's central bank fully executed on blockchain, while Santander Corporate and Investment Banking (CIB) announced its first programmable intraday repo transactions with J.P. Morgan via Digital Financing on its blockchain-based Kinexys Digital Assets platform.
As overhyped as bitcoin and crypto currencies might make the term 鈥榖lockchain鈥�, the reason for such genuine interest, and such eager uptake of the technology, is that it does truly have a lot to offer. From increased liquidity to improved security, blockchain brings a wealth of benefits to repo participants.
What鈥檚 in a name?
Though the terms are often used interchangeably, blockchain is in fact a specific type of DLT. Put simply, blockchain is a public, centralised and immutable ledger that stores records across a peer-to-peer network. Each record, or 鈥榖lock鈥�, is stored in chronological order, and is linked to its predecessor in a digital 鈥榗hain鈥� 鈥� hence the name.
Being a centralised ledger, there is only the need for one record, which everybody has access to. As each block is immutable, no records can be tampered with or changed after they have been recorded. Any errors need to be corrected via a new, independent transaction.
Being a digital system, the blockchain is able to contain 鈥榮mart contracts鈥� 鈥� snippets of code that automatically execute an agreed action when specific conditions are met. These self-executing digital agreements help reduce the need for any intermediaries or manual processes and speed up virtually any aspect of a transaction.
New technology, established market
These broad, generic benefits are amplified when applied to repo transactions. As Ed Tyndale-Biscoe, head of Secured Funding at ION Markets, notes: 鈥淒istributed ledger technologies have the potential to be transformational in overhauling the repo market鈥檚 complex settlement and post-trade processes.鈥�
鈥淭he market has successfully issued numerous financial instruments on blockchain networks,鈥� highlights Johann Palychata, head of Partnerships and New Platforms, 麻豆传媒 Services, BNP Paribas, adding: 鈥淯sing them for refinancing purposes through repo is a natural use case. It was therefore only a matter of time for such usage to gain traction.鈥�
This positive note is mirrored by Horacio Barakat, head of Digital Innovation at Broadridge: 鈥淒istributed Ledger Repo is transforming repo market infrastructure. Via the utilisation of tokenisation and smart contracts, DLR allows for better collateral velocity, optimal liquidity management, reduced financing costs and operational risk.
鈥淒LR currently processes over US$1.5 trillion in notional every month in multiple types of repo transactions. Intraday repo is one example of one of the advancements that DLR is bringing to repo markets.鈥�
The centralised and immutable nature of blockchain transactions help bolster transparency and accountability 鈥� all parties involved can check and verify each stage of a transaction and the collateral involved, all in real-time. This potentially means increased confidence both in each transaction and in the market as a whole.
Similarly, the cryptographic security involved with a blockchain transaction, and the decentralised, peer-to-peer nature of DLT, inherently add another element of confidence and security for all participants.
The use of smart contracts means the terms of a repo agreement can be automatically enforced, reducing the potential for human error and the need for manual intervention. Pre-agreed smart contracts can enforce the transfer of collateral and payment terms with no room for argument.
Palychata notes: 鈥淏lockchain enables the digitisation of contracts and programmable money, hence automated transactions. It also accelerates the movements of collateral and the transfer of assets.鈥�
This automation means settlement times are reduced 鈥� to the point of making T+0 feasible with intraday settlement 鈥� while minimising the chance of settlement failure, and therefore reducing costs.
Tyndale-Biscoe expands: 鈥淚t can lower the costs associated with all forms of secured funding transactions and increase collateral fluidity by improving settlement efficiency 鈥� bringing the settlement cycle into a fully real-time model, increasing collateral visibility leading to a reassessment of liquidity management.鈥�
Smart contracts mean regulatory requirements can be adhered to automatically, reducing the risk of noncompliance, while the ability to monitor transactions in real-time, the immutable nature of blockchain, and the inherent 鈥榓udit trail鈥� available through the linear block-linked system, all result in greater regulator compliance and monitoring.
DLT reduces the need for intermediaries 鈥� such as agents, clearing houses and custodians 鈥� in a transaction, further reducing costs. The automation brought by smart contracts and reduction in the need for manual input, not only reduces the costs associated with errors and settlement failures, but also improves the efficiency of the repo process.
In addition, Tyndale-Biscoe suggests: 鈥淭he use of smart contracts can simplify the client onboarding process and simplify the post-trade lifecycle process. We also know it can open new options to market participants.鈥�
These benefits are already being actualised. Speaking of the work at Broadridge, Barakat says: 鈥淏y integrating smart contracts and tokenisation, we are enhancing operational efficiency and creating new opportunities for seamless transactions. Our focus on interoperability ensures that these advancements work harmoniously across various platforms, driving innovation and setting new standards for the future.鈥�
Bits and pieces
Blockchain and tokenisation go hand-in-hand, and in repo, the tokenisation of assets and collateral brings its own set of benefits. Tokenisation 鈥� breaking down underlying assets into smaller fractions, digitally tradable 鈥� can potentially open up a range of new assets as collateral, or enhance the ease and use of current asset classes. It also has the potential to make the transfer and trade of collateral across jurisdictions and markets easier.
Reducing the usual complexities associated with moving collateral across borders, as well as removing the need for intermediaries and enabling real-time tracking, allows for greater efficiency and collateral optimisation, as well as reducing costs.
Tokenised assets can also be traded 24/7 via DLT-based platforms. Combined with the potential lower barriers to entry that digitisation of assets brings, as well as the increased ability for global trading via blockchain without the need for central clearing houses, tokenisation and DLT can lead to increased trading and enhanced liquidity.
鈥淚t can lead to an increase in trading volumes since tokenised assets can be traded round the clock on DLT-based platforms, and enhance liquidity by democratising market participation, since tokenisation allows for fractional ownership,鈥� confirms Tyndale-Biscoe.
Up and coming
It is natural, then, that all these potential benefits are seeing the blockchain repo market grow rapidly. 鈥淭he use of DLT in repo, and securities lending markets is continually growing. We鈥檙e seeing platforms such as HQLAX and J.P. Morgan鈥檚 Onyx process billions in daily repo volumes already, and others claiming trillions in monthly volumes.
鈥淩ecently there are reports of fully-digitised securities, using central bank digital currency being traded end to end within the euro collateral trading environment,鈥� Tyndale-Biscoe emphasises.
There is, of course, still a fair way to go, and despite some systems seeing trillions in monthly volumes, the total number still lags far behind the traditional repo market. 鈥淲e are getting there,鈥� as Palychata puts it.
鈥淭echnical and functional layers are progressing fast, and this is a great collective achievement. We are seeing more and more transactions occurring between various counterparties,鈥� he highlights.
Naturally, this type of new technology and market apparatus takes time to disseminate more broadly, and certainly, the early signs (if they can still be considered such) seem to be positive. Liquidity will be essential.
Palychata notes: 鈥淧articularly in our industry, the benefits materialise only when a market or a venue reaches sufficient liquidity,鈥� adding: 鈥淭he next steps involve achieving a critical mass of liquidity in blockchain networks. We expect the key stakeholders of these blockchain initiatives to be aligned on this objective.鈥�
In the long run, there are also a number of potential hurdles the market will need to address. Interoperability between the various networks and platforms will be key. Palychata expands: 鈥淏uilding interoperability is essential, as multiple networks are expected to coexist. There might be scenarios where cash is on one network and securities on another, but this should not add friction to the trades.鈥�
Barakat confirms: 鈥淚nteroperability between platforms and with existing market infrastructure is critical for success. Once interoperability is achieved, it is pretty seamless to manage collateral and cash in a synchronous way and achieve atomic simultaneous digital settlement.鈥�
There are, however, already positive signs in this direction, Tyndale-Biscoe believes, saying: 鈥淚nteroperability and standardisation is needed across platforms and providers 鈥� though there are signs this is coming.鈥�
In a similar vein, and as is often the case across the global financial markets, any differences between the various regulatory and legal frameworks between countries, will seemingly act as a roadblock for a technology that is almost inherently global by nature.
鈥淒isparate regulatory and legal frameworks remain a key obstacle to wider implementation and adoption in physical settlement paradigms,鈥� Tyndale-Biscoe advises, adding: 鈥淛oined-up policymaking will be crucial as the use of blockchain for repo develops, as well as a willingness to work together.鈥�
He also notes: 鈥淗ow the traditional settlement model interacts with cryptocurrency markets and exchanges remains somewhat uncertain.鈥�
Addressing these issues will arguably be the driving force for DLT repo participants and platform providers for the foreseeable future. Again, almost by its nature, this technology, and the market it is helping facilitate, sseem likely to have those involved all 鈥榦n the same page鈥� when it comes to achieving these objectives.
Likewise, a continued 鈥榩roof of concept鈥� that successful use of DLT brings to the market, is likely to garner greater interest and adoption. Across the board, legacy systems are being replaced by newer, digitalised systems.
Palychata says: 鈥淪takeholders need to continue to prove to the market how the use of blockchain adds value. It is expected that further education about this new technology will complement the rising number of trades in the next 18 months.鈥�
As Tyndale-Biscoe concludes: 鈥淓fficient, globally interconnected securities markets demand digitalised settlement. It鈥檚 the case that evolution from physical to digital-based settlement is a question of when, not if.鈥�
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