Today Broadridge announced its distributed ledger repo (DLR) solution is live. It launched an initial pilot for bilateral repos in 2017 with Natixis and Societe Generale.
Although the company didn’t state which institutions are currently live on the platform, it shared that average daily volumes in the week since launch have been $31 billion. According to SIFMA, the U.S. repo market size in terms of average daily outstanding balances was $4.5 trillion in 2020. It should come as no surprise that Broadridge has quickly managed to achieve some scale as its conventional systems process repo transactions for 19 of the 24 primary dealers.
A typical repo transaction happens when a financial institution borrows cash by selling securities, often treasuries, and agrees to repurchase them at a slightly higher price in the near future. For the cash borrower, it meets a short term cash need, and for the other party, they may be looking to hold a particular type of collateral or security. According to the BIS, nowadays in some markets, demand for specific collateral is often a more significant driver than cash.
DLR enables the agreement, execution and settling of repo transactions on a single ledger. The underlying collateral securities are locked and tokenized, enabling ownership to be transferred using smart contracts. Settlement is made by triggering a payment on conventional payment rails rather than cash on ledger. The transaction is atomic, so payment and ownership transfer are simultaneous, reducing counterparty risk.
The solution enables intraday transactions which provide new options for treasurers. But apart from that, blockchain-based repos eliminate failed transactions and remove reconciliations.
“This is the first step in the transformation of the $10T global bilateral repo market using smart contracts and distributed ledger technology,” said Vijay Mayadas, President of Capital Markets at Broadridge.
“Co-innovating with market participants, we are able to bring solutions to our network of clients that create the next level of operational efficiencies. Within the repo market, distributed ledger technology and smart contracts have shown that they can play an instrumental role in driving efficiencies, reducing risk and enhancing liquidity while leveraging the existing legal and account frameworks.”
In terms of technology, DLR uses DAML smart contracts combined with VMware Blockchain.
Meanwhile, in December last year, JP Morgan said its Onyx blockchain division had developed an intraday repo transaction platform. While Broadridge has the advantage of serving 19 of 24 primary dealers, JP Morgan has different ones. Late 2019 research from the BIS showed that the big four U.S. banks play a significant role as repo market lenders. Hence JP Morgan is itself a major player in the repo market. Furthermore, its JPM Coin solution has the potential to provide cash on ledger as opposed to needing to depend on payment rails, although the underlying cash needs to be held in a JP Morgan bank account.