HQLAˣ Conference 2022 – Margin Solutions
I was recently invited to attend the second HQLAᵡ conference at the Goldman Sachs offices in London and to be a panel moderator for the ‘Margin Solutions’ panel. I was gifted a fantastic panel of contributors and we were charged with considering industry solutions for Margin and Collateral including DLT, tokenisation and how the path was likely to evolve. With Goldmans, Citi, Eurex and Acadia representation, we were lucky enough to hear different views across the same issue.
Before we evangelised about the future opportunities presented to our industry, the panellists spent time outlining the current challenges regarding market interoperability and connectivity. The takeaways were clear, there is an ongoing intention to improve, noting progress has been made. The usage of tri-party has increased (IM), and there is a focus on costs and operational efficiency, which remains a high priority across firms. Further work on asset mobilisation, utilising trapped assets, recognising the intrinsic value within a portfolio of assets and reducing settlement fails are all mutual challenges to be solved.
The panel evolved into the future discussion by looking at improved and greater connectivity between the derivatives and repo markets in supporting the growing needs of industry participants for additional collateral to support increased margining requirements. We talked further about collateral mobility and velocity, understanding where your collateral is geographically, under which legal entity and at which custodian can all be improved by tokenisation and moving assets to the blockchain. Ensuring those assets can be utilised to support internal funding requirements and also embedded into pricing at trade execution is an intrinsic part of increasing tokenised and digital asset usage.
TradFi and DeFi are working with each other, one heavily regulated industry, one where regulation is in its infancy. The panel believed that creating a consistent operating model irrespective of asset type was a vital component of tokenisation. The question of legal enforceability has been a concern for clients. Legal certainty in default, and the ability to liquidate and make yourself whole is a risk concern for any asset, digital or otherwise.
Where does that mean we are when it comes to a significant adoption of tokenised or digital assets? Despite the advances, the panel thought there was still some way to go. Tri-party platforms and settlement mechanisms must evolve to support different products and optimal operational performance. Regulatory oversight remains an open discussion. What will the framework look like, and will this accelerate the move to market efficiency or create additional hurdles?
In summary, DLT, tokenisation and digital assets have moved from concept to reality, barriers are being removed. Their increased usage will improve operational friction, help reduce costs, and improve returns for firms that increase or enhance their reuse. Watch this space!
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