Testing New Waters
In the financial services industry, blockchain has found a wealth of applications. It is being used to issue loans and trade in securities.
Now, it will soon be adding repo transactions to the ever-growing list as Deutsche Boerse and Commerzbank have completed a proof-of-concept (PoC) for a repo transaction. This was announced by Deutsche Boerse on March 6, 2019, via a press release.
What Is A Repo Transaction?
Contrary to popular assumptions, repo transactions don’t strictly refer to the repossession of assets due to payment defaults.
In this case, the repo referred to a situation of short-term borrowing where a dealer sells a security for a brief amount of time (sometimes less than 24 hours) with the intention of repurchasing it later. The party selling the initial security sees the transaction as a repo, and the party re-selling it back to the original owner considers the operation to be a reverse repurchase agreement.
In this case of Deutsche Boerse and Commerzbank, blockchain technology was used to facilitate the transaction, and the asset in question was an $11.3 million bond which was issued by KfW Bankengruppe and was to be held by the buyer for a seven day period for an interest rate of -0.5 percent.
The transaction was facilitated by Commerzbank, who recently finished a blockchain pilot with Siemens and Continental and Deutsche Boerse who generated digital tokens which were exchanged via their blockchain platform between the parties involved. The blockchain platform was developed by Commerzbank’s R&D unit “Main Incubator” while the PoC platform was designed by both firms jointly.
Deutsche Boerse and Commerzbank stated in their press release that the use of blockchain significantly improves the process of a repo transaction by reducing settlement times and making sure there is more efficiency and transparency.
“In past [DLT] pilots we have focused on new issue projects; with the transaction between Deutsche Boerse and Commerzbank we were now for the first time able to convert existing securities into digital tokens,” said Michael F. Spitz, CEO of Commerzbank’s R&D unit.