Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: Thanks for listening, and now onto today's show.
Speaker: Hi, my name is Lindsay Mackey, and I'm a Product Development Manager for Securities Lending and Treasury at HSBC Security Services.
Speaker: I'm joined today by John O'Neill, Global Head of Digital Asset Strategy, and Jamie Anderson, Global Head of Collateral Treasury Trading, to discuss where we're seeing digital assets being utilized in the securities finance space and the initiative HSBC is involved in to use digital assets for specific use cases.
Speaker: John, considering the spectrum and characteristics of digital assets is quite wide,
Speaker: Can you start by clarifying which kind of digital assets are seeing adoption by institutions, specifically in the securities finance space?
Speaker: Yeah, thank you, Lindsay.
Speaker: I think actually it's a great question to start with because there's a lot of different ways you can categorize different types of digital assets.
Speaker: I think maybe the most clear way to categorize them are two broad categories.
Speaker: And actually, I think at HSBC, we're in a fairly unique position.
Speaker: because we've created both of these categories on our HSBC Orion platform.
Speaker: So the first category is what we sometimes call natively digital assets.
Speaker: What does that mean?
Speaker: So natively digital means that you create the asset on a blockchain, you only create the asset on a blockchain, and it lives its entire life cycle on that blockchain.
Speaker: And we've done that, as I said, on our HSBC Orion platform, and we've specifically done it for digital bonds.
Speaker: And the reason that we took that approach of creating natively digital bonds on HSBC Orion is
Speaker: is it means that token transfer is aligned with legal title transfer.
Speaker: That is to say, because the bond is not a copy of something which exists elsewhere, it only exists on the blockchain.
Speaker: When you receive the token, you do receive the bond.
Speaker: The two things are the same.
Speaker: The token is the bond.
Speaker: And that alignment between token transfer and legal title transfer is really important to unlock the true benefits of DLT and blockchain, particularly rapid settlement of assets.
Speaker: That's category one, natively digital.
Speaker: But the second category is also really valid and important for particular use cases.
Speaker: And as I said, we've also done the second category on HSBC Orion, and that's deliberately tokenized copies of real-world physical assets, which of course exist elsewhere.
Speaker: And that's typically an approach that's favored in commodity and physical markets where people don't want just virtual assets.
Speaker: They want to tie back to a real-world physical asset.
Speaker: There's lots of examples of people insist on physical assets.
Speaker: Oil would be one or other commodities.
Speaker: But the one we've pioneered at HSBC, on HSBC Orion, is tokenized physical gold.
Speaker: So the approach that we use there, we often say is a digital twin.
Speaker: That's to say, when you trade the token, of course you're trading the token, but it represents something which exists in the real world.
Speaker: And in this case, it's a physical bar of gold
Speaker: a named specific numbered bar of gold which exists in a HSBC warehouse.
Speaker: So you trade the tokens, you get the benefits of owning the gold, it's tied back to something which is real world and exists in this case in a HSBC warehouse.
Speaker: And then Lindsay, I'll just also add those are the two types of digital assets.
Speaker: But underpinning all of this is developments in digital money, because digital assets are far more efficient if you use digital money to pay for them.
Speaker: We often like to say financial transactions are delivery versus payment, DBP, as we like to say in the market.
Speaker: So having both legs, the delivery and the payment digitized is really powerful and we think is a great development for the future.
Speaker: And because of HSBC's very big presence in payments in FX and trade finance and other money businesses, we're investing a lot of time in central bank digital currencies, tokenized deposits and other innovative forms of digital money.
Speaker: And that all supports our approach on digital assets.
Speaker: Thank you, John.
Speaker: Jamie, what are the current inefficiencies in traditional finance infrastructure which can be overcome by investment in the digital ecosystem?
Speaker: We're invested as a bank in a number of initiatives, some more than others, some are internal, some of the points that obviously John has spoken about, also with external platforms and providers.
Speaker: We're doing that because we believe there will be a continued demand on collateral, cross-asset, cross-jurisdictions, and for us to become a lot more effective in our collateral management, but also in a precise and efficient manner.
Speaker: This means getting the right assets to cover the right exposures at the right time.
Speaker: For example, we've developed in-house a collateral optimization engine, which is called Optic.
Speaker: But we developed that with cloud-based solution with Google AI engineers.
Speaker: And that really gave us the ability to enhance our collateral allocation and to leverage that to cover kind of additional exposures outside of our tri-party collateral over the coming months and years.
Speaker: But when they're looking at a pure digital element, using tokenization or native digital assets in the collateral ecosystem,
Speaker: There's a lot more work and time and resources to spend on enhancing that facility and that ability as well.
Speaker: We see a move to meeting collateral applications intraday.
Speaker: So that's not end of day covering exposures, it's pure intraday and actually minute by minute.
Speaker: And we may also want to do that outside of normal supplement hours.
Speaker: So 24-5 or actually even potentially 24-7 type environment, being able to use our inventory
Speaker: at all times throughout the day.
Speaker: There's a third element, which is actually using trapped assets.
Speaker: So assets which are not traditionally within the Scrooge financing ecosystem, or ones that are in the ecosystem, but are actually trapped and not usable today.
Speaker: For example, moving a collateral receipt or a digital collateral receipt should be quicker and cheaper to move than the asset itself in some markets.
Speaker: And the fact that we can do that in a precise manner, minute by minute, in a defined way,
Speaker: should really reduce intraday credit and liquidity risk.
Speaker: So with those three elements, moving to a data-rich, real-time, intraday funding and collateral world is definitely exciting, hence why we're investing in this space, but also not without cause for plenty of questions around providers, consumers, who's providing the intraday, who's consuming the intraday,
Speaker: but also risks around delivery.
Speaker: And what are the specific use cases for digital assets or tokenization?
Speaker: Is it mostly a post-trade initiative or the trading side as well?
Speaker: Well, kind of following on really from the comment I made before, there's a number of platforms out there, ION being one, where we're holding native digital assets.
Speaker: And we want to be able to connect that platform, again, as I said, with the traditional collateral management ecosystems.
Speaker: So it is pre-trade because we want to be able to use the digital bonds or digital assets that are being generated into the traditional ecosystem as seamlessly as possible.
Speaker: So doing a repo on a bond that's issued on our own is super important to us and something we're actively working on.
Speaker: I think there's also a case with other providers.
Speaker: We've recently invested in the recent funding round into HQLX.
Speaker: because we think that platform provides us with a number of opportunities.
Speaker: Some are live, some are being worked on.
Speaker: One of the ones that is live is the agency's lending transaction where we have taken and traded recently with Bank of New York via the HCOX platform a digital collateral receipt.
Speaker: Taking that digital collateral receipt versus collateral,
Speaker: intraday atomically settled as a DVD transaction.
Speaker: For us, what does it mean?
Speaker: It means we've taken an asset at a particular time during the day, not leaving it to the settlement cycles to get it late in the day or not being, again, precise with whether we're receiving the asset, but also reducing intraday risk
Speaker: and liquidity risk.
Speaker: I think also there's another trade transaction which is near term that has been worked on by a number of providers, JP Morgan, Boney, Broadridge and others are looking at intraday repo.
Speaker: We're super excited about engaging on those platforms and all those products because we definitely think as a clearing bank that we will need to trade intraday repo
Speaker: to manage our intraday cash flows and also provide some sort of hedging against our intraday liquidity.
Speaker: So, it is free trade and definitely we're engaging across different platforms to be able to mitigate those risks as mentioned earlier.
Speaker: And John, what do you think of this?
Speaker: I think Jamie's put it very well.
Speaker: I think when considering what digital asset markets need to look like in the future, it's good to consider all the activity that happens currently in markets.
Speaker: It may be the case in digital asset markets that certain processes or procedures can be streamlined, and in some cases, maybe even entirely eliminated.
Speaker: But broad categories of activity like free and post-trade are certainly going to exist.
Speaker: And I think it's very important when we consider market structure change, market development, and also infrastructure that can support all of that.
Speaker: We are considering the full range, the full lifecycle of trading activity, making sure we're deploying platforms like HSBC Orion or like some of the third party platforms that Jamie's mentioned, which can improve process and do things better, which is always the theme, I think, for digital assets.
Speaker: And where is the industry right now and what progress have we seen so far?
Speaker: I'd say, Lindsay, the industry right now is at what I would think of as a takeoff moment.
Speaker: I think the truth is the development of digital asset markets has taken a long time.
Speaker: It's taken longer than most of us who have been involved in this subject would wish.
Speaker: But what we're seeing in 2024 for the first time is a takeoff in terms of liquidity.
Speaker: And for me, in all markets, liquidity is always the theme.
Speaker: Digital asset markets should be as liquid as conventional markets.
Speaker: They should be as easy to use as conventional markets.
Speaker: And I think we'll really know who has succeeded with digital assets when they're treated very much as business as usual activity rather than one-off.
Speaker: or exciting or interesting trades.
Speaker: And we're seeing the first steps towards that.
Speaker: On our Orion platform, when we launched in Hong Kong in February this year, we had really unprecedented demand for the digital bonds that we put live as part of that issuance with the Hong Kong government.
Speaker: We put four digital bonds live.
Speaker: It was a multi-currency issuance, which was exciting and a world first.
Speaker: But what was perhaps even more exciting was the range of demand
Speaker: that we saw for those bonds from investors and others.
Speaker: And we saw more than a billion US dollars worth of demand.
Speaker: We reached the issuance limit for the bonds, which was 6 billion Hong Kong dollars.
Speaker: So that's about 750 million US dollars
Speaker: And we saw a very wide range of investors, more than 50 investors, which was really unprecedented for a digital bond issuance.
Speaker: And I think that example hopefully speaks to the themes I described, which is a liquid market, liquid in the primary, trades in the secondary, repo and securities financing activity on those bonds, which is always critical for market development, and increasingly creating a culture of
Speaker: where the benefits of digital assets are realized, but investors and others treat them pretty much as a normal asset, have a wide range of participation and always a wide range of liquidity.
Speaker: So, Lindsay, I think this year is where the market is finally reaching that point.
Speaker: I think that's a very exciting moment.
Speaker: I have to agree with John.
Speaker: I think in terms of pace of change, we see it on the trading side, on the collateral treasury side, we definitely see an acceleration in the conference
Speaker: Thank you both for sharing your thoughts and the initiatives that are bringing digital assets to the securities finance space.
Speaker: It feels like we're at an exciting stage in the journey of utilizing this technology to provide new solutions to our counterparties.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
