DLT has been widely discussed as a means of enhancing intraday liquidity. For example, there are multiple intraday repo solutions, with Broadridge’s DLR responsible for the post trade of more than $1 trillion transactions a month. UBS and JD Risk recently published a whitepaper exploring other examples of intraday opportunities.
As context, UBS is an investor in Fnality International, the DLT settlement solution backed by 20 institutions. Late last year Fnality entered the first stages of going live in the UK, under the watchful eye of the central bank. Participants deposit money in a UK central bank omnibus account, from where it is tokenized and used for wholesale payments. UBS isn’t simply an investor. Back in 2016 it was amongst the first institutions to embrace the concept which originally was known as the Utility Settlement Coin.
The authors point to a BIS report that shows that US Fedwire participants have around $1 trillion in intraday liquidity balances to deal with unmatched incoming and outgoing payments. The top ten institutions account for 60% of activity, so are estimated to set aside an average of $60 billion each for intraday liquidity. Given the money is sitting at a central bank, it earns some interest. However, the banks have to raise additional funds, so it’s estimated the net interest cost is equivalent to the 5-year CDS spread or around 100 basis points. That equates to $600 million cost per year for each of those ten banks.
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