A new industry initiative has mapped out the path for using tokenized money market funds as collateral. Global Digital Finance (GDF) has published findings from a 70-firm working group that tackled European legal questions around tokenized collateral. The effort included simulations involving 30 organizations, among them Commerzbank, Deutsche Bank, Lloyds, BlackRock, Franklin Templeton, Schroders, State Street and UBS.
The work addresses a persistent market challenge. Today, 68% of variation margin comes in cash, according to a 2024 ISDA survey. When the UK gilts crisis erupted in 2022, insurers holding assets in money market funds faced a crunch: they needed to liquidate positions to deliver cash for margin calls. Had they been able to transfer money market funds directly as collateral, the crisis might have been mitigated. While many money market funds are already eligible as collateral, the inability to transfer them instantly limits their use.
The GDF paper takes a realistic view of the significant work ahead. The working group explored “how tokenization changes the legal, operational, and regulatory properties that determine a fund’s usability in this context and how market participants interpret the risks that may arise in the tokenization process and how these risks affect the commercial viability of TMMFs as a form of collateral.”
For the legal work, the working group focused pragmatically on three jurisdictions: the UK, Ireland and Luxembourg. Since roughly 80% of European money market funds are domiciled in Ireland and Luxembourg, and most institutions use ISDA’s standard collateral contract governed by English law, these three jurisdictions cover the key scenarios.
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