FIA released a white paper on the potential application of tokenisation to accelerate the mobility of collateral in the cleared derivatives industry.
The paper states that the cleared derivatives industry is at an "inflection point" in the adoption of tokenisation and notes that several clearinghouses are exploring use cases for this technology. It describes the potential benefits and some of the challenges for adoption at scale and concludes with four recommendations.
“Over the last several years, we have seen a growing recognition among our members that tokenisation could have a practical use case in how we manage the movement of collateral,” said FIA president and CEO Walt Lukken. "By creating a digital representation of an asset on a distributed ledger, tokenisation can allow us to move collateral in close to real time. That can unlock liquidity and reduce risks and costs associated with traditional settlement processes."
The paper calls attention to four main benefits of tokenisation:
- It would increase the speed of asset transfers, especially for non-cash collateral, by cutting the settlement time from days to minutes.
- It would allow for extended trading hours, including the potential for 24/7 trading, by decoupling the settlement system from the operational hours of traditional banking system payment rails.
- Using distributed ledger technology would reduce the errors that arise when each entity keeps its own record of the transaction on its own system and the inefficiencies that arise from the duplication of processes across financial institutions.
- It could help automate certain functions with "smart contracts," whereby code attached to the tokenised asset fulfils certain actions when specified conditions are met.
"Years of work on this technology are starting to bear fruit," said Will Acworth, global head of market intelligence. "We are seeing that scepticism give way to genuine interest as firms see real-world benefits in terms of operational efficiency and real-time risk management. Although there are many issues that will need addressing before it can be deployed at scale, we think the time has come for both the industry and its regulators to recognize the benefits of technology and work together on adoption."
The paper outlines four recommendations:
- The importance of education, and how FIA can play a supporting role by connecting experts in blockchain technology with the operations, risk, funding, compliance, legal and other professionals who manage the movement of collateral in today’s technology systems.
- Legal certainty will speed adoption. FIA has analysed the US regulatory landscape but more work is required across the globe to clarify whether existing rules permit tokenised assets for use as collateral.
- Adoption of this new technology should start with forms of collateral that meet existing regulatory standards for liquidity, such as certain government bonds and money market funds.
- Strong collaboration and industry standards will increase adoption. The movement of collateral involves many segments of the cleared derivatives ecosystem, including clearinghouses, clearing brokers, custodians, market participants, traditional technology providers and the next generation of blockchain network providers. One way to encourage adoption across this ecosystem is through pilot projects, tabletop exercises and other forms of collaboration.
