Those I have worked with over the last few years know my obsession with using tokenized High Quality Tokenized Assets (HQLA) as margin collateral and a means of settling trades. Broadly defined, HQLA is cash held at banks, cash that has direct access to a Sovereign’s Repo Window, or short-term Sovereign debt like T-Bills.
🧠The opportunity to update current collateral processes is massive.There is approx $505 Billion in centralized clearinghouses as of Sept 30 2024. And ISDA’s December 31 2023 reporting of $1.4 Trillion collateral outstanding is mind-blowing. That’s approx $2 Trillion of cash and short term sovereign notes sitting in traditional vaults and moving on slow and costly rails. We can do better.
For financial institutions, asset managers, and corporates, tokenized collateral represents a bold step toward greater flexibility, cost savings, and efficiency. As the ecosystem matures, this could redefine how we view collateral management in both cleared and non-cleared markets.
The new US Administration’s recent Executive Order, Circle’s purchase of Hashnote & partnership with Digital Asset’s Canton Network, and conversations I have had with custodians and asset managers show me this massive market is finally attracting the attention it deserves. Some thoughts below:
🔗 Why This Matters:
1️⃣ Increased Efficiency: Tokenized assets allow for near-instant settlement and real-time tracking, addressing operational delays in traditional collateral management.
2️⃣ Improved Use of Capital: When collateral can move 24/7, in seconds, at almost zero cost, less collateral will be needed to support open positions thereby unlocking more capital to be put to use.
3️⃣ Transparency & Security: Built on blockchain, tokenized assets offer unparalleled transparency and reduce counterparty risks through immutable records. We still need to get the right mix of transparency and privacy so that firms do not have to disclose their positions, but that is an easy, though not simple, build.
📜 Recent Developments:
- ISDA’s Tokenized Collateral Model Provisions: I was fortunate to speak with ISDA’s Legal team in 2023 when they were thinking through adding Tokenized Assets to their Legal templates. Since then ISDA has adapted its 2016 Credit Support Annexes to allow for the inclusion of tokenized assets as “DLT Cash” or “DLT Securities.” This paves the way for their use in bi-lateral derivatives transactions.
- Clearinghouse Adoption: Tokenized assets offer an opportunity for clearinghouses to modernize collateral frameworks, allowing participants to leverage digital assets while maintaining robust risk management. The major clearinghouses have been building and testing the use of blockchains and tokenized assets internally for years. However the lack of regulatory clarity (especially in the US) did not allow for a compliant commercial model to be built that mimics the current commercial models these clearinghouses are built upon. There are a number of HQLA tokenized asset business models that will now allow for commercial discussions with clearinghouses to begin in earnest.
🔮 The big questions: Are we ready to fully embrace this paradigm shift? With clear regulatory frameworks and ongoing collaboration, tokenized assets could revolutionize the future of collateral.
Let’s discuss: How do you see tokenized assets impacting collateral frameworks? Are you exploring their potential? Drop your thoughts below! 👇
#Blockchain #TokenizedAssets #Collateral #ISDA #Clearinghouses #Innovation #Finance
CONMODUM 