Blockchain/DLT Case Study: Revolutionising Capital Market- Broadridge’s DLT Repo platform

Making the $10Tn+ repo market safer and more efficient: Every day, trillions of dollars’ worth of securities move across the global repo market. The complexities of these transactions make them prone to failures, errors and disputes.

In a repo transaction, one party sells securities to another with an agreement to repurchase them at a later date at an agreed-upon price. This transaction is effectively a short-term loan, secured by some collateral. For the market to function effectively, collateral needs to be free of credit risk and be highly liquid.

REPO Market size : $10T global bilateral repo

Use Case: A typical repo transaction occurs 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. This arrangement meets the short-term cash needs of the borrower, while the lender gains access to a particular type of collateral or security. According to the BIS, in some markets today, the demand for specific collateral often drives repo transactions more significantly than the need for cash.

The DLR platform facilitates the agreement, execution, and settlement of repo transactions on a single ledger. Collateral securities are locked and tokenized, allowing ownership to be transferred using smart contracts. Settlement is triggered through conventional payment systems rather than using cash on the ledger. This atomic transaction ensures that payment and ownership transfer occur simultaneously, reducing counterparty risk.

A significant advantage of the DLR platform is the ability to execute intraday trades, which is especially beneficial as interest rates rise. Settlement times are flexible and can be mutually agreed upon by counterparties. Additional benefits include a shared workflow, resulting in cost savings and enhanced collateral mobility 

 A Citi GPS research report in March identified “the collateral/securities borrowing and lending market, or as it is colloquially called, the repo market” as a key segment “that faces significant operational friction and could derive immediate benefits from tokenization.”

How DLR works

DLR uses smart contracts to "mutualize the workflow." This means that instead of actions occurring separately on each party's internal systems, which may not align with one another, the use of smart contracts ensures they are synchronized. This synchronization is achieved because the agreement, execution, and settlement of repo transactions take place on a shared ledger.

The underlying collateral securities are locked and tokenized, allowing ownership to be transferred using smart contracts. As a major technology player in the U.S. fixed income market, Broadridge leveraged its existing connectivity with central securities depositories (CSDs) and custodian banks to build the DLR platform.

Settlement is triggered through conventional payment systems rather than using cash on the ledger. This atomic transaction ensures that payment and ownership transfer occur simultaneously, reducing counterparty risk. Broadridge is also participating in trials involving digital money.

DLR offers significant flexibility through the use of smart contracts. This flexibility applies not only to the term of the repo, whether intraday or otherwise, but also to its support of various repo trade types, including centrally cleared ones.

The platform provides a library of smart contracts that govern agreements and workflows, which users can edit or customize to create their own. The solution is so versatile that it has even been used for outright cash transactions that do not involve the return of collateral.

Onyx by JP Morgan will enable its JPM Coin tokenized deposit solution to be used for on-chain settlement for Broadridge’s Distributed Ledger Repo (DLR) platform. Onyx uses a permissioned version of Ethereum and DLR uses the DAML smart contract language and the VMWare blockchain, but the latest version of DAML includes the Canton blockchain. 

Benefits of Brordridge DLR Platform

With DLR, the buy and sell side realize tangible benefits from better performance, greater efficiency, lower costs and more security. Broker dealers save ~25-50 bps of premium by not having to borrow from internal treasury and avoid 100+ bps penalties for late-day borrowing. Settlement certainty nearly eliminates overdraft fees caused by failed settlements, which can exceed ~300 bps. Capital charges based on internal borrowing and daylight overdraft costs also decline, while collateral is optimized to meet required value without overcollateralization, resulting in an average ~25% clearing cost reduction for clients.

Broadridge processes repo transactions for 20 of the 24 primary dealers in the US. DLR currently processes over $1 trillion per month in notional value across multiple use cases for eight entities.

Typical Annual Savings : $2M to $3M

Other use cases in Repo

Platforms such as HQLAᵡ, JPMorgan’s Onyx repo platform have begun to process billions in securities lending volumes already and have potential to scale up furthers. HSBC initially used the Baton Systems DLT FX solution for trillions of dollars of intra-group transactions before using it with Wells Fargo for bilateral FX transactions. This would bring significant operational and capital savings to the industry.

The Future of Repo Transactions: How Tokenization is Reshaping the Industry

Asset tokenization provides institutions with the ability to turn an illiquid asset into a liquid asset. By creating a token to represent a security or real-world item, they can trade, sell, or share an asset more easily, automate transactions around that asset, and bring agility to processes that previously required intensive oversight. 

The promise of using tokenization in repo markets is that through tokenization an institution can increase liquidity, use a larger variety of assets for collateral, and bring a measure of efficiency to the transaction process.

By tokenizing these transactions, every aspect of the repo agreement—including the securities themselves, the repurchase obligation, and the payment—can be represented as digital tokens on a blockchain. This offers several potential benefits:

• Increased Transparency: Every transaction is recorded on a blockchain, providing a transparent and immutable ledger of all transactions that can be viewed by all parties involved.

• Enhanced Security: The use of blockchain can help reduce the risk of fraud and unauthorized transactions, as the security features of blockchain like encryption and distributed consensus mechanisms protect the integrity of the transactions.

• Improved Efficiency: Tokenization can streamline the repo transaction process, reducing the need for intermediaries and potentially lowering transaction costs and settlement times.

• Automated Compliance and Settlement: Smart contracts—self-executing contracts with the terms of the agreement directly written into code—can automate many aspects of the repo transaction, including compliance checks, settlement, and even the enforcement of the repurchase agreement, reducing manual intervention and the potential for errors.

https://www.broadridge.com/report/distributed-ledger-repo

https://blog.digitalasset.com/blog/customer-story-broadridge

https://www.kaleido.io/blockchain-blog/repo-tokenization

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