Frictionless trade: collateral just the beginning

July 29, 2021

The article was first published in the Securities Finance Times Issue 282 (p.26-27)

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Frictionless trade: collateral just the beginning

Alex Pugh reports

Guido Stroemer at HQLAᵡ sets out how the firm’s collateral mobility-boosting distributed ledger technology lays the groundwork for its long-term vision to transition towards a frictionless model of asset transfers

HQLAᵡ chairman and CEO Guido Stroemer thinks the main challenge in transforming the securities lending industry via distributed ledger technology (DLT) is human nature’s resistance to change. Implementing innovative emerging technology solutions is hard work, Stroemer told SFT, as it requires strong collaboration and broad consensus building, not only with direct partners and supporters, but also amongst perceived competitors. To illustrate his point, Stroemer quoted Niccolò Machiavelli’s 16th  century  political treatise, The Prince — “There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. For the innovator has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order, this lukewarmness arising partly from fear of their adversaries … and partly from the incredulity of mankind, who do not truly believe in anything new until they have had actual experience of it.”

“This quote captures the essence of the challenges faced by any agent of change,” Stroemer said, and it applies to HQLAᵡ in applying innovative DLT technology to help improve collateral mobility across the securities finance ecosystem. “Thankfully, HQLAᵡ has received strong support from incumbent market players from our very inception, and this support continues to grow day by day.”

Movers and shakers

On the origins of the DLT initiative, Stroemer said HQLAᵡ started out as a proof-of-concept project in R3 Laboratory, a DLT and blockchain software development company, in 2017, which built HQLAᵡ on the company’s Corda blockchain. “During this initial project, we built a prototype of our operating model and received valuable feedback from five global banks on the viability of taking our proof of concept into production,” Stroemer said.  

The feedback received was “resoundingly positive”,  and so production of the  platform began with Deutsche Börse Group instrumental early supporters, underscored by their strategic investment in the company in 2018. “Together with Deutsche Börse Group, we brought the HQLAᵡ operating model into production in late 2019,” Stroemer added.

We have always prided ourselves as being a platform “designed by the industry, for the industry”, Stroemer said, “and we always knew that to achieve scalable market adoption, we would need the support and buy-in from the broader securities finance community”.

HQLAᵡ received important support in 2020, when it successfully closed a Series-B strategic investment round led by BNY Mellon, Goldman Sachs, BNP Paribas Securities Services and Citigroup, with participation from longtime strategic partner Deutsche Börse Group.

“Just very recently we received further industry buy-in when we welcomed J.P. Morgan as our newest strategic investor,” Stroemer added. Not only is the financial backing from these recent investments substantial, but the public commitment from these new investors to connect to the HQLAᵡ platform “speaks volumes towards validating our vision to accelerate collateral mobility across the global securities finance ecosystem”, Stroemer said.

Freedom of movement

HQLAᵡ’s immediate mission statement is to help improve collateral mobility amongst market leading tri-party agents and custodians in Europe, Stroemer said. “Our longer-term vision is to accelerate the financial ecosystem’s transition more broadly towards frictionless ownership transfers of assets.” In order to achieve this vision, HQLAᵡ will expand the depth of its product offering over time and extend the jurisdictional reach of the platform.

Stroemer is cautious of replicating the fragmentation of the past. The genesis behind the creation of HQLAᵡ was to help the industry solve interoperability bottlenecks across a siloed securities settlement system, Stroemer said, “so the last thing we want to see now is a siloed ecosystem of DLT platforms across the securities finance ecosystem”.

Looking to the future, Stroemer said HQLAᵡ’s view of the securities lending and financing marketplace is one in which depositories, for a multitude of asset classes located across the global jurisdictional landscape, are connected by an interoperable network of digital registries. Together, Stroemer concluded, they will facilitate seamless ownership transfers, not only for cash and securities, but also for other asset classes such as commodities, precious metals and digital assets.