Digital Assets - Transforming Collateral Management

EXECUTIVE SUMMARY Collateral Management on the Digital Launchpad: A Collaboration with JSCC As leading infrastructure providers for the financial industry, DTCC and Japan Securities Clearing Corporation (JSCC) have been exploring how blockchain and distributed ledger technology (DLT) could have a transformative effect on global capital markets. We’ve been examining how tokenization of real-world assets could revolutionize collateral management by addressing long-standing inefficiencies in existing business processes while introducing new capabilities. As part of our collective active pursuit of the transformative potential of digital assets in collateral management, JSCC leveraged DTCC’s Digital Launchpad to develop a groundbreaking proof of concept (PoC) focused on Central Counterparties (CCPs). Given their vital role in capital markets, CCPs are a critical part of the collateral management value chain, receiving collateral deposits across a diverse range of products. By leveraging digital assets for collateral processing, CCPs can potentially enhance market stability, improve digital asset quality, and increase the efficiency and liquidity of collateral. This PoC goes beyond the deposit and return of digital assets, cash, stocks, and bonds as collateral. It offers innovative solutions aimed at overcoming existing constraints and exploring new business opportunities. Key Takeaways Notably, the experiment helped demonstrate that digital assets can significantly enhance the speed, transparency, and efficiency of collateral processes, leading to improved risk management, capital utilization and liquidity for participants at all levels in the ecosystem. Using DTCC’s Digital Launchpad, JSCC could rapidly issue tokens representing cash, stocks, and bonds as native digital assets without needing to develop their own infrastructure, significantly increasing the speed at which the idea could be taken to execution. By tokenizing assets, automating margin calculations and the movement of assets as collateral on the network, JSCC realized operational and capital efficiencies for each market participant in the process. The PoC demonstrated seamless integration between margin calls and deposits/withdrawals of tokenized assets, and standardized smart contracts/applications leading to mitigation of inefficiencies in workflow and communications across the CCP, clearing members, and clients. Additionally, the PoC enabled identification of enhanced mechanisms for intraday swapping or replacing various types of digital assets (cash, stocks, bonds), and the establishment of an on-chain shared database to enable sell-side and buy-side participants to evaluate and optimize their own collateral processes, while significantly improving their ability to manage operational and market risks. In the following section, we zoom in on the specifics of this groundbreaking experiment, highlighting the practical applications and market impact, and the path forward for JSCC.

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DTCC DIGITAL LAUNCHPAD

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