German FIs trial blockchain security transaction
Written by Chris Lemmon
Commerzbank, KfW Banking Group and MEAG, the asset manager of Munich Re and ERGO, have jointly traded a Euro Commercial Paper (ECP) issued by KfW, and simultaneously replicated the transaction in a blockchain.
The security was sold to MEAG, and settled without a paying agent or a clearing system. This pilot transaction comprised a €100,000 issuance volume with a five-day term.
In parallel to issuance and settlement, key transaction elements were replicated and simulated by means of distributed ledger technology, using the R3 Corda platform. For this purpose, the standard number of required intermediaries was reduced, this allowed for an immediate posting. In parallel a real-time replication of the transaction was done using distributed ledger technology.
With this pilot transaction, the institutions involved have now simultaneously simulated key elements of a real transaction with several counterparties via a blockchain. Looking to the future, the option of immediate securities settlement may offer significant benefits. Firstly, a more streamlined transaction processes and a reduced number of intermediaries can offer efficiency gains. Secondly, a same day value date can reduce settlement risk, thus providing relief in terms of capital. As money-market instruments are usually traded in high volumes, a marked reduction in capital and liquidity costs can be expected.
Roman Schmidt, Commerzbank’s divisional board member for corporate finance, said: “The pilot transaction has demonstrated that the issuing as well as the trading of securities can be simulated in real time via Blockchain technology. Transforming securities transactions into digital issues may open up significant potential for efficiency gains.”
Frank Wellhöfer, managing director for investment controlling, back office and IT at MEAG, added: “This project has allowed us to analyse from an investor's perspective the impact of blockchain technology on front and back-office processes, and regulatory aspects. The future belongs to digital business processes.
“The potential efficiency gains and cost benefits are already highly attractive when looking at existing processes; the opportunities offered by the further development of our processes promise additional revenues for our clients.”