Building Pipes

January 19, 2021

This article has been published in the Securities Finance Times - Issue 269

Drew Nicol reports: HQLAᵡ is now backed by some of the biggest names on Wall Street. COO Nick Short lays out why connectivity is the key to success and what’s next for the DLT platform provider

HQLAᵡ recently revealed it has secured fresh funding from multiple international banks who will also be directly connecting to the DLT platform in various capacities. What does this mean for your growth?

Beyond the substantial financial backing we’ve received from BNY Mellon, Goldman Sachs, BNP Paribas Securities Services and Citigroup, as well as our existing strategic partner in Deutsche Börse, the most important thing is it allows us to continue our focus on collaborating with key industry partners to further enhance the platform functionality and meet the needs of our clients.

Beyond the core securities finance market, we also have a longstanding relationship with R3 who provide the technology - Corda Enterprise - for our distributed ledger technology (DLT) platform.

For our newest partners, BNY Mellon will connect as both a triparty agent and agent lender, Goldman Sachs as principal, BNP Paribas Securities Services as a triparty agent, and Citibank as a custodian.

What’s key here is that these big name firms are committing publicly to our platform, which is very important for us. Having BNY Mellon and BNP Paribas as triparty agents goes a long way to enhancing the ‘network effect’ of our platform by adding the collateral pools they manage. Citibank as a custodian also brings another collateral pool.

Moreover, having BNY Mellon also operating as an agent lender will increase the supply of upgrade transactions on our platform, while Goldman Sachs as a principal should help drive overall volumes.

This is in addition to Clearstream, Euroclear and J.P. Morgan, all of which are all already connected to the HQLAᵡ platform as triparty agents.

The adoption of DLT solutions within securities finance has come a long way from conversations of theoretical use cases. Could 2021 be a pivotal year for DLT?

It’s clear that infrastructure providers and market participants are taking DLT seriously and this is another example of that.

There are other examples, such as with J.P.  Morgan’s intraday repo transaction which used an in-house blockchain platform back in December. It all adds further validation that DLT can provide efficiency benefits for not only securities finance and collateral management markets but also the wider financial industry.

HQLAᵡ had a busy 2020 and now you’ve had a positive start to 2021. How are you looking to grow from here?

The platform today supports collateral swaps. Primarily, we enable simultaneous exchange of ownership for baskets of securities without settlement movement between custodians or triparty agents.

In the near term, meaning this year and next, we are looking to connect additional triparty agents and custodians, as well as additional clients.

In terms of products, we are working on specific flows for agency securities lending and others such as one-sided title transfer. Our aim is to address ‘specific pain points’ for our clients and for the broader benefit of the securities lending and collateral management market.  

The reality is that there are many things we could focus on, so we’re careful about developing the ideas that will provide the most benefit to our clients. For the solutions that reach the top of the priority list, we run regular client roundtable meetings to help focus everyone on designing the solution, validating it, and to then get the solution up and running on the HQLAᵡ platform.

In terms of technical connectivity, we’ve put considerable effort into defining flows in order to plug into existing infrastructure providers, and we’ve continued to streamline our technical connectivity to clients to facilitate their onboarding to HQLAᵡ.  

For example, we’ve worked with the Deutsche Börse Trusted Third Party to deliver a solution to make the Securities Financing Transactions Regulation reporting of HQLAᵡ collateral swap transactions as easy as possible for our clients.

Another example of innovating on top of our initial product, is that we’re working with a leading agency securities lender to enable their bank borrowers and beneficial owners to benefit from exchanging ownership of collateral and principal legs simultaneously via the HQLAᵡ platform.  

For borrowers, this will help avoid the capital costs that exist today because of intraday credit exposures and operational risk caused by the collateral and principal legs moving at different times.

Last year saw demand for high-quality collateral and overall trading volumes spike. How did the COVID-19 pandemic affect your business and your clients?

During the Spring volatility last year we heard from our clients that some of the products we’ve laid out in our future roadmap, such as pledges, would have helped them navigate the period if they were available.

We’ve been exploring creative ways to use the HQLAᵡ platform to help clients satisfy pledge requirements. These could be to offset counterparty credit exposures to a central counterparty or a bilateral counterparty for over-the-counter derivatives, or to help source intraday cash liquidity with a clearing bank or central bank.

Roughly the past decade has been dedicated to meeting new regulatory requirements. Now there is a sense that houses can pause for a breath and look at their core processes and see which could be automated or made more efficient. Optimising collateral across multiple uses, in particular, is being driven by the regulations such as the Uncleared Margin Rules as well as internally.

HQLAᵡ is a European platform, but do you have a vision of entering other regions?

We see a lot of requests from other regions but we are staying focused on Europe to begin with. Our aim is to add real value to our European clients first and foremost but it is a global marketplace and many of our clients operate globally.