Cash & Liquidity ManagementPaymentsCommerzbank leads securities transaction via tokens 

Commerzbank leads securities transaction via tokens 

Partners successfully completed the settlement of a legally binding secondary market securities transaction via tokens.

Commerzbank, Deutsche Börse and MEAG, the Asset Manager of Munich Re and ERGO, have taken the next step in examining the scope of distributed ledger technology in post-trade services by completing a transaction based on tokens.

The partners successfully completed the settlement of a legally binding secondary market securities transaction via tokens; Commerzbank further used the tokenized cash as collateral at Eurex Clearing as Central Counterparty. The prototype scenario reflected a delivery-versus-payment transaction and the transfer of tokenized cash, aimed at exploring the potential of various comprehensive services leveraging distributed ledger technology.

“This is an important joint effort in further exploring the potential of distributed ledger technology for the financial services industry,” Jens Hachmeister, Head of New Markets at Deutsche Börse Group said.

“By combining multiple use cases within these transactions, we have broadened the scope of applications where the market can benefit from possible standards in this new technology. Our goal is to foster our role as financial infrastructure provider of choice,” he added.

Digital tokens

For this transaction, digital tokens were generated using both commercial bank money (cash tokens) and securities (securities tokens). The simultaneous swap of the tokens as final and binding settlement was enabled by using distributed ledger technology. As a further use case for cash tokens, Commerzbank provided the tokenized cash credits for coverage of margin requirements at Eurex Clearing as Central Counterparty as part of their operative risk management.

Dr Frank Wellhöfer, member of the board of management at MEAG, believed that could significantly increase the efficiency of operations.

“By reducing the need for intermediaries, the transaction process of securities is going to accelerate furthermore. The involvement of tokens representing securities and money will facilitate network efficiencies and build a foundation for the creation of standards. This is important for the buy side as standards lead to broader market acceptance and thus create liquidity on DLT platforms in general,” he said.

Eurex Clearing acted as tokenizer of cash, MEAG as the buyer of securities and Commerzbank as the seller and the custodian of the securities tokens. Main incubator, Commerzbank’s research and development unit, provided the blockchain platform.

New era of distributed ledger technology

There was excitement at Deutsche Börse over the potential that this next step in tokenisation provided, with a spokesperson for Deutsche Börse believing that it could herald a new era of disruption in the industry.

“The tokenization of assets as the next level of asset digitization is already transforming current economic landscapes. What we know as financial instruments today will be the digital assets of tomorrow. Moreover, in the future we will be able to tokenize all kinds of assets such as industrial goods or real estate. The variety of assets will grow,” they said.

“Looking at the pace of technological progress and the transformational potential that lies in Distributed Ledger Technology, we might stand at the beginning of a new era that could be disruptive for the whole industry. What will be essential for the future success of tokenization is a respective framework and  infrastructure.”

Impact on Treasury

However, Deutsche Börse believed it was “too early to assess” what impact the development could have on treasury as it depends on what services are brought to the market.

“The tokenization of assets and transfer versus cash is a building block which was proved feasible with our joint prototype scenario. Right now, it is too early to assess the impact for treasurers as this depends on actual services market players will develop upon. Time will show which services offered are of market significance to change or impact current treasury processes,” a Deutsche Börse spokesperson said.

Next stage

The underlying technology and the legal concept were jointly developed by Commerzbank and Deutsche Börse. As a first step of their collaboration on DLT, Commerzbank and Deutsche Börse already completed a legally binding repo transaction earlier this year.

“After our first collaboration with Deutsche Börse in March 2019, we are pleased to jointly reach a further milestone in using DLT for post-trade-services in capital markets. We will continue to work on these topics to provide our clients with market-ready solutions,” said Benjamin Duve, Head of Custody & Direct Market Access, Commerzbank.

As for how long it was before tokenisation became commonplace, Deutsche Börse were cautious, acknowledging that first the infrastructure needed to be put in place alongside a regulatory framework.

“The technical progress around Distributed Ledger Technology is evolving at a tremendous pace, but the respective infrastructure is still lagging behind. We see a huge demand for a trusted, comprehensive, highly secure and regulatory compliant ecosystem for the emerging digital asset universe. Much of the process will depend on how fast a regulatory framework can be established,” a Deutsche Börse spokesperson said.

The concept of this test transaction has been shared with regulatory and oversight authorities. Further productive introduction remains subject to their approval and the compliance with regulatory requirements and applicable policies. The partners aim to further develop financial markets infrastructure and services for the future, first steps to establish a respective framework have recently been initiated by the German Federal Government.

 

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