Our initial position when we started this journey was to avoid big bang changes, but to instead take incremental steps towards adoption of new technologies, says Elisa Poutanen, head of sales at HQLAX.
The HQLAX operating model offers a DLT layer that 鈥渟its on top鈥� of existing market infrastructure, helping their clients to reap the benefits of the technology 鈥� facilitating frictionless mobilisation of assets, streamlined reconciliation procedures and greater consistency of information 鈥� all without changing the underlying securities custody infrastructure or the legal frameworks that govern that infrastructure.
As HQLAX clients advance in their digital journey, Poutanen notes, they are assessing the benefits of hosting nodes in their own data centres or cloud providers to support a mature DLT framework in the future. She says: 鈥淚n general, we anticipate an improvement in the connection between the analogue and the digital world. The ability for our customers to integrate traditional assets and digitally represented assets within a single collateral inventory is key 鈥� that is where we think the market is heading.鈥�
No longer in the test phase, HQLAX clients are actively using the platform. Poutanen reveals that the firm has passed a 鈥渧olume milestone鈥� with over 鈧�1 billion worth of 35-day evergreen transactions executed on the platform. 鈥淚mportantly, we have onboarded a number of new clients during the first three quarters of the year and the pipeline of new clients onboarding to HQLAX is robust,鈥� Poutanen adds.
The HQLAX platform is providing value not only to the front-office teams, but also to the banks鈥� post-trade functions. For example, Poutanen says, the benefit of transferring the ownership of securities without having to execute any cross-custodial settlement creates an opportunity to reduce settlement fails and the associated costs. The reduction in settlement fails is important to HQLAX clients in the current regulatory context, laying the foundations for greater collateral velocity and better collateral allocation.
Poutanen continues: 鈥淲hereas many might have underestimated the importance of this subject in the past, the possibility to use new technology such as DLT to reduce the settlement risks is now widely recognised as a benefit to our customers鈥� back and middle-office teams.鈥�
Going beyond
For HQLAX, DLT is 鈥渃rucial鈥� in helping the market to tackle collateral management challenges. Therefore, interoperability with other DLT ledgers has been a key theme for HQLAX this year. The firm prides its operating model on providing a layer of interoperability across disparate collateral pools and triparty agents. Poutanen comments: 鈥淲e think that additional innovation will be achieved by collaborating with other tech providers, as well as other DLT ledgers. We are already engaged in several collaborations and are very excited about the opportunities that lie ahead of us and our partners.鈥�
Adapting to keep up with client demands, HQLAX鈥檚 initial use case focused on the development of a delivery-versus-delivery (DvD) mechanism that allows the ownership of baskets of securities held in different custodial locations to be transferred at precise moments in time on a single ledger. The firm is now seeing client demand for use cases where a basket of collateral on the HQLAX ledger can be exchanged against, for example, digitised cash on another ledger, creating interoperability and data-sharing capacity between those ledgers.
The majority of the products that HQLAX is building today are variations of the original product solution. While the current production solution caters for upgrade transactions settling in triparty environments, an important goal for the firm has been to expand its product scope and to provide access to the platform for a wider community of securities financing market participants.
Poutanen notes: 鈥淔rom the inception of our company, we have prided ourselves on being a platform designed by the market for the market. Collaborating with industry players to solve business problems using DLT has been part of our DNA from day one. We continue to collaborate with our clients to solve business problems this way.鈥�
Industry players that recently collaborated with the firm include BNY Mellon and Goldman Sachs, which settled the first agency securities lending transaction using the HQLAX DLT platform. Through this transaction, HQLAX created an ISIN-level securities tracker, which is represented by the digital collateral record (DCR) from the loan securities that Goldman Sachs received from BNY Mellon.
According to Poutanen, the ISIN-level DCRs are the very first of their kind and represent specific ISIN quantities held in custody at any time. Those records enable the holders and the agents to transfer ownership of any security on the HQLAX ledger without the need for conventional settlement mechanisms. It paves the way for eligible clients to reuse those ISIN-level DCRs in onward collateral obligations at one or more triparty agents.
鈥淚n general, this agency lending model, which we have created in close collaboration with BNY Mellon and J.P. Morgan agency lending teams, enables the agent lenders and the counterparties to use and reap the benefits of the delivery-versus-delivery settlement mechanism,鈥� says Poutanen. The model provides an opportunity for agent lenders and borrowers to enter the flow with minimal operational and technical impact on their systems.
HQLAX aims to continue to expand the size of its agent lender and borrower client base in coming months. Poutanen explains that the model has received a 鈥渟ignificant amount鈥� of market support and interest for its uniqueness and 鈥渢angible benefits鈥� for bank borrowers.
A global connection
Expanding its geographical focus, HQLAX鈥檚 compass is pointing toward Europe, as a Luxembourg-based company, where the firm is concentrating on increasing its footprint through volumes and overall traction by bringing new customers onto the platform. However, it is also building the foundations to expand its services to other jurisdictions such as the US and APAC markets.
Poutanen informs that the industry can expect a lot from HQLAX. She says: 鈥淲hile we keep growing the HQLAX ecosystem from a market adoption and volume growth perspective, we will continue to develop the platform to promote the key themes of collateral mobility and interoperability.鈥�
The previously mentioned ISIN-level DCRs create an opportunity for clients to freely mobilise assets in one or more triparty agent鈥檚 books through the HQLAX platform. To further enhance collateral mobility for its customers, HQLAX plan to roll out a service called Triparty Access in H1 2023, whereby clients will be able to off-ramp securities from the HQLAX ledger to all the major triparty agents in Europe.
Announcing further developments to the platform, Poutanen reveals a roadmap of new services that have been formed after the closure of a Series B strategic investment round, with investments from BNY Mellon, Goldman Sachs, BNP Paribas 色花堂Services, Citigroup, J.P. Morgan and Deutsche B枚rse. The services present new use cases that aim to create value for stakeholders, while maintaining a balance between increasing volumes on existing live products versus new products in development.
Poutanen adds: 鈥淥ne exciting example of our product development roadmap is our collaboration with major buy-side entities, to help them to solve margining workflows for OTC derivatives using DLT.鈥� By using the platform, asset managers will be able to streamline and de-risk their collateral management activities related to pledging non-cash collateral as variation margin.
鈥淔or a longer-term outlook, we view the securities lending and financing marketplace as being one in which custodian depositories, for a multitude of asset classes located across the globe, are connected by an interoperable network of digital registries,鈥� Poutanen concludes. 鈥淭his will facilitate seamless ownership transfers across many asset classes and jurisdictions.鈥�
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Chris Watts
Image: Elisa Poutanen 