ING-Blockchain Securities Lending

Dutch bank ING has pumped an undisclosed sum into blockchain-based securities lending start-up HQLAX, as it bids to bolster liquidity in the market following the implementation of tough capital rules.

Previously in December 2019, the securities lending platform commercially launched with backing from the ING blockchain team, and the first post-production transactions involved Commerzbank, Credit Suisse and UBS.

“The successful commercial launch of HQLAX is a big milestone for the implementation of blockchain in the securities lending market and proof that blockchain can bring tangible benefits to the industry,” said Mariana Gomez de la Villa, head of ING’s blockchain team.
“It’s rewarding to see that a project we’ve been working on for years, is now live.”

Under the strict new liquidity requirements of the Basel III accord, banks need high-quality liquid assets, which must be easily and immediately converted into cash without losing their value. Holding too many lowers their return, and so efficient trading allows banks to optimize their balance sheets.

The platform enables banks to swap High-Quality Liquid Assets (HQLA) including as government securities, bonds and equities on the blockchain, enabling intraday swaps.

Presently, collateral is held in custody and when portfolio swaps are upgraded or downgraded, the custodians or collateral agents usually have to legally transfer ownership and move the assets, which can be a lengthy process. The Trusted Third Party, owned by Deutsche Börse, sits between the custodians (tri-party agent) and HQLAX, ensuring the collateral stays with the original agent.

The first live securities trade on a blockchain platform saw a swap of €25m ($27m) of high-quality liquid assets with Credit Suisse using the collateral lending application of HQLAx.

The HQLAx collateral lending application achieved a legal title transfer of baskets of securities through the transfer of ownership of the unique DCR-linked accounts themselves.

HQLAX said it is currently onboarding at least 15 new members, including CIBC, Citi, Goldman Sachs and ING. The tri-party agents involved at launch were Clearstream Banking and Euroclear Bank, and JP Morgan is expected to be live in the second quarter.

HQLAX CEO Guido Stroemer said he sees future potential for using digital collateral records (DCR) for pledging securities for OTC or centrally cleared derivatives exposures.

In November, HQLAX launched its collateral management solution built in conjunction with Deutsche Börse, which to date, was the start-up’s principal outside investor, and the first post production transactions were between Credit Suisse, UBS and Commerzbank.

HQLAX originally started as an incubator project at enterprise blockchain firm R3, and the initial prototype was done as an R3 Lab with five banks.

ING and its team developed much of the prototype’s code. A live pilot took place in 2018 with ING and Credit Suisse, prior to the collaboration with Deutsche Börse.