Commerzbank and Deutsche Börse carried out a legally binding securities settlement via distributed ledger technology. The repo transaction was conducted as part of a proof of concept, demonstrating the security and transparency of block-based delivery-by-payment.
It is proof of Blockchain’s possibilities for legally binding securities transactions: In the course of a Proof of Concept (PoC) of Deutsche Börse in cooperation with Commerzbank, the partners successfully concluded a repo transaction using Distributed Ledger Technology (DLT), such as Deutsche Stock Exchange announced on March 6.
Combination of cash tokens and security tokens for simultaneous exchange
In a repo transaction, which is also called repurchase agreement, a financial transaction combines the simultaneous sale and subsequent repurchase of a security. Banks can use these money market instruments to secure their liquidity needs in the short term.
The repo transaction was based on a bond issued by KfW Bankengruppe amounting to more than ten million euros. The term was seven days with a negative interest rate of -0.5 percent. The simultaneous exchange of the tokens was legally binding.
The financial institutions generated digital tokens in the form of book tokens (cash tokens) and securities (security tokens) for the prototype transaction. Deutsche Börse acted as the lender and Commerzbank as the borrower. The research and development unit of Commerzbank, “main incubator”, acted as a blockchain platform operator via a legal and technology concept. The partners developed this concept specifically for the feasibility study.
The possibilities of DLT for repo transactions
According to Deutsche Börse, the successful transaction shows significant advantages of Blockchain for securities trading on the basis of delivery versus payment. In this way, a real-time picture reduces counterparty risk and reduces capital costs. Furthermore, the shortened execution time could allow the direct and transparent involvement of regulators and supervisors.
Jens Hachmeister, responsible for DLT, Crypto Assets and New Market Structures and Deutsche Börse, said he was satisfied:
“The successful completion of the joint project motivates us to further explore the power of distributed ledger technology, with particular focus on the integrated cash-on-lead payment function that we have successfully demonstrated here setting new standards is a high priority for Deutsche Börse Group, and this process will be conducted in close cooperation with partners, regulators and central banks. “
Next steps are closely linked to the creation of legal framework conditions. Commerzbank and Deutsche Börse also see themselves as pioneers of an innovative financial market infrastructure in the blockchain sector.