JP Morgan touts DLT, tokens for collateral management

As demand for non-cash collateral has grown following a spate of market stress incidents that sharply raised margin requirements, JP Morgan is using distributed-ledger technology (DLT) to move non-cash collateral faster, managing director Toks Oyebode said during a panel in London on Thursday hosted by the International Swaps and Derivatives Association (Isda).

“There are infrastructure issues in terms of how quickly you can move non-cash collateral relative to cash collateral to support something like variation margin payments in the cleared market,” he said.

Oyebode, who is the executive director of JP Morgan’s office of regulatory affairs, said that on a medium-term basis, DLT “could be quite helpful in terms of being able to move non-cash collateral more quickly” and in using securities more efficiently as an industry.

JP Morgan’s Onyx Digital Assets platform currently uses blockchain to settle repo transactions. In May, the bank announced that its JPM Coin, an internally built digital token used to facilitate interbank payments, would be used to settle intraday repo transactions on Broadridge’s Distributed Ledger Repo (DLR) platform.

Other major banks such as UBS and Singapore’s DBS Bank have rolled out DLT solutions for funding markets, and BlackRock has experimented with tokenizing money market funds. Some central counterparty clearinghouses are also working to create a proof-of-concept that would be able to accept tokenized collateral, Oyebode said.

His comments followed a speech by Nat Banjamin, executive director for financial stability strategy and risk at the Bank of England. Both discussed the demands on liquidity presented by the higher margin requirements during periods of market stress and high volatility, such as the initial Covid-19 lockdowns in March 2020, the 2021 collapse of Archegos Capital Management, and the 2022 Russian invasion of Ukraine.

Adam Jackson, vice president of government affairs and public policy at BlackRock, said counterparty risk has been replaced with liquidity risk. He noted the inefficiencies posed by redeeming exchange-traded funds and money market funds as cash for collateral, just to have them reverted back to their original unit later in the day.

As DLT has struggled over the last decade to find plausible use cases in finance, some industry practitioners said collateral management may make a good place to start. A similar discussion between fund managers and clearing firms took place last month during an industry panel at the Futures Industry Association’s (FIA’s) International Derivatives Expo in London.