October 23, 2018

October 22, 2018

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First Securities Lending Transaction Using Blockchain Technology Completed

It was reported this month that ING Groep NV and a major international bank recently completed the first live securities lending transaction settled using distributed ledger technology (“DLT”). The transaction involved the banks swapping baskets of government securities through a collateral lending application from financial technology company HQLAx built using bank consortium R3’s Corda DLT. Securities lending transactions involve the temporary exchange of securities (including legal title), usually for other securities or cash of an equivalent value, with an obligation to redeliver a like quantity of the same securities at a future date.

Currently, securities lending transactions require the transfer of underlying securities between party accounts. For this transaction, the banks agreed to transfer legal title to baskets of government securities on the DLT platform by transferring ownership of HQLAx Digital Collateral Records (“DCRs”), while the underlying securities were held at a third-party custodian. According to HQLAx, DCRs created using Corda allow market participants to exchange legal title ownership of and/or pledge baskets of securities in real-time using standardized legal documentation and “haircuts”. Each DCR is intended to be backed by pre-defined baskets of eligible collateral which are stored for safekeeping in a segregated custody account at a trusted third-party custodian. The creator of each DCR has an obligation to maintain securities in the DCR custody account equal to or greater than the notional value of the DCR.

The lynchpin of the transaction is reliance on DCRs to effect legal title transfer of the underlying securities that comprise the DCRs, thereby facilitating liquidity transfers without the requirement to actually move the underlying securities through the custodian infrastructure. The importance of the transfer of legal title is twofold. First, it allows the borrower to deliver the securities onward, for example to settle a short trade. Second, it means that the lender generally receives value in exchange for the disposition of legal title (whether in cash or securities), which ensures that the loan is collateralized.

While HQLAx noted that this was only a pilot transaction, it represents an important milestone and HQLAx is targeting the end of 2018 for rollout of a production-ready securities lending platform.

© 2018 Proskauer Rose LLP.

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About this Author

Charles Dropkin, Proskauer Law Firm, New York, Finance Law Attorney
Partner

For a broad-based perspective, clients rely on Charles Dropkin’s diversified business and litigation skills. Charles provides solutions based on careful and keen judgment.

A partner in the Corporate Department and former head of the Finance Group, Charles has extraordinary experience in transactional, regulatory and litigation matters as they affect financial services entities (U.S. and non-U.S. banks and bank holding companies, investment banks, insurance companies and hedge funds) as well as family trusts and private equity/venture capital...

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Daniel G Nelson, Proskauer Rose, Corporate Lawyer
Associate

Dan Nelson is an associate in the Corporate Department.

  • Fordham University School of Law, J.D., 2012

  • Middlebury College, B.A., 1998

 

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