ABN AMRO Clearing, Nasdaq, Euroclear, and EuroCCP have together completed a proof of concept (PoC) for putting securities to a better use while covering margin calls even after business hours. The system, based on distributed ledger technology, also referred to as blockchain, resolves the issues and inefficiencies related to the allocation of collateral to Central Counterparties (CCPs). Furthermore, the PoC also demonstrated that a shared, robust network can be created between collateral providers, receivers, and intermediates.
The financial markets have been undergoing a flurry of operational changes recently. This includes the introduction of extended trading hours in stock exchanges and the need to clear derivatives traded bilaterally (OTC) in a centralized manner under the European Market Infrastructure Regulation (EMIR). As of today, a CCP margin call should be quickly covered by Euro collateral to avoid liquidation. The options are limited to a user after the regular banking hours. Several CCPs allow the use of securities to cover after-hours margin call. However, this method is not an ideal one due to the complex and inefficient delivery processes.
Therefore, there exists a need to create an efficient securities collateral solution to an increasing number of buy-side market participants who centrally clear their derivative trades. The system developed by the organizations mentioned above enables the parties to handle margin call, securities collateral delivery, and the return process within minutes. Furthermore, clearing participants and CCPs were able to optimize their positions through a collateral dash board.
The Euroclear’s Central Securities Depository processes the underlying collateral transfers and ensures regulatory compliance and settlement finality. While Nasdaq developed the PoC for the DLT nodes, ABN AMRO Clearing, Nasdaq Clearing, and EuroCCP built a custom front-end and managed integration into their own ecosystem.
Commenting on the blockchain based margin call solution, Coen van Walbeek, Global Head of Treasury and SBL at ABN AMRO Clearing said:
“With a faster and more globalised market, it is essential to make the processing of collateral more efficient. Expanding the possibilities to use securities as collateral will make clearing through CCPs more attractive and cheaper for buy-side market participants. This is a breakthrough for the CCP model.”
Diana Chan, CEO at EuroCCP said
“We are excited to be partnering on a proof of concept that is extremely useful for transactions that are not already well-served by market infrastructures. With a solution like this in place we will be able to efficiently provide counterparty risk protection of equity trades after hours while reducing operational complexities. Today we are limited by European banking hours or arrangements in other time zones.”
Walter Verbeke, Global Head of Business Model and Innovation at Euroclear added
“As a major collateral house, holding € 28.5 trillion worth of assets, we are pleased to participate in this initiative. It demonstrates that a smart combination of NewTech and the resilience of the Central Securities Depository can work effectively and in full compliance with regulatory requirements.”
Julia Haglind, CEO of Nasdaq Clearing commented
“As both a leading market technology provider and a CCP operator, Nasdaq is uniquely positioned to bring efficiencies to collateral management. We believe that blockchain technology brings with it a huge potential to transform markets everywhere, and this project is an excellent showcase of this.”