Liquidity Alliance Builds Blockchain For Cross-Border Collateral Transfers

Established in January 2013, the Liquidity Alliance (LA) is a partnership of market infrastructures to provide a platform for central securities depositories (CSDs) to collaborate on collateral management solutions for the global financial industry.

Central securities depositories are specialist financial organizations that hold securities for many different clients, either in physical or electronic form. CSDs provide custodial services and make it possible to transfer securities by book entry, which is a system of tracking ownership of those securities when no certificate is given to investors.

Four members of the Liquidity Alliance group are currently working with the Deutsche Börse to launch an initiative that will leverage the blockchain to ease cross-border mobilization of security collateral. The four members include the Canadian Depository for Securities Limited (CDS), Clearstream (Luxembourg), Strate (South Africa), and VPS (Norway). The quartet of members wish to overcome the hurdles of moving collateral across various jurisdictions, and by utilizing the blockchain, will make transfers faster and more efficient.

Since the financial crisis of 2008, regulators have been requiring market participants to provide collateral to mitigate risks within the financial system. Following the crisis, some of these added regulatory frameworks are found in the US Dodd-Frank Act and the EMIR. Fully known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, it is a US federal law that places regulation of the financial industry in the hands of the government. The European Market Infrastructure Regulation (EMIR) is a European Union regulation designed to increase the stability of over-the-counter (OTC) derivative markets throughout the EU. Due to these regulatory frameworks, there is a growing demand for high-quality collateral, yet access is limited. CSDs are supporting this market with real-time collateral management to ensure exposures are covered sufficiently, and local collateral is quickly transferred or allocated.

Through jointly-provided, regulated market infrastructures, this initiative will utilize the distributed ledger technology to create a hybrid-blockchain prototype, known as ‘LA Ledger,’ which will be implemented on the Hyperledger Fabric blockchain. Because of the permissioned nature of LA Ledger, it will be used to enable a centralized, faster, and more efficient allocation of fragmented security positions to cover financial obligations of market participants between various jurisdictions. The decentralized design of this blockchain will allow for direct interaction between participants, giving it the potential to simplify all of the complex processes involved with collateral transfers. 

President and Chief Clearing Officer of CDS, Glenn Goucher stated:

“With this initiative, we pursue an innovative partnership approach that will allow us to jointly embark on distributed ledger technology with a use-case that is highly relevant to the wider industry.”

CEO of VPS, John-Arne Haugerud added:

“LA Ledger is designed to simplify cross-border collateralization away from using multiple complex and non-standardized links towards smooth movement across various jurisdictions.”

CEO of Strate, Monica Singer said:

“We look forward to engaging with regulators and market participants to validate the proposed solution. We are convinced that integrating this new technology into a permissioned environment of neutral regulated entities is the right way forward.”

Validation from regulatory authorities and market participants for LA Ledger will start in the second quarter of 2017. As more regulators join the blockchain ecosystem, it will propel adoption and use, and be the catalyst for widespread utilization.