Europe’s securities regulator wants to know whether tokenized collateral is safe enough for central counterparties (CCPs). In a call for evidence published today, the European Securities and Markets Authority (ESMA) set out its starting position. Tokenization earns no special treatment, and tokenized collateral has to be as legally certain and as easy to sell in a crisis as the conventional kind. The paper proposes no rule changes and responses are due by January 15.
The exercise is forward looking. ESMA noted a number of industry projects that use distributed ledger technology (DLT) to mobilize collateral, but said HQLAᵡ is the only one in central clearing it has come across in its supervisory work. The Luxembourg platform went live in 2019 and is now used by Eurex Clearing to receive margin. By its own description HQLAᵡ is a digital collateral system, with no token involved.
CCPs stand between the two sides of a trade and guarantee it. They can do so because members hand over collateral. If a member fails, the CCP has to seize those assets and turn them into cash quickly. Tokenization promises to move collateral faster, for example by meeting a margin call the same day using bonds, without the need to sell them first. ESMA wants to know whether that speed costs any certainty on the day of a default.
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