Commerzbank, KfW Banking Group and MEAG, the asset manager of Munich Re and ERGO, have jointly traded a Euro Commercial Paper (ECP) issued by KfW, and simultaneously replicated the transaction in a Blockchain.
The banks used R3's Corda platform, demonstrating the move from the proof of concept stage to a real transaction. The security was sold to MEAG, and settled without a paying agent or a clearing system. This pilot transaction comprised a €100,000 issuance volume with a five-day term.
In parallel to issuance and settlement, key transaction elements were replicated and simulated by means of distributed ledger technology, using Corda. For this purpose, the standard number of required intermediaries was reduced, which allowed for an immediate posting. Normally, securities settlement and related payments require two days, due to the restrictions imposed by clearing systems which necessitate deferred timing.
Commerzbank was the driver of this R3 initiative, which has been in development since 2015. This pilot transaction, using a money market instrument, allowed individual transaction steps to be made transparent in real-time, and also provides a basis for regulatory reporting. Money-market instruments are usually traded in high volumes; their short terms and simple structures make them a nice fit for DLT.
Roman Schmidt, Commerzbank's Divisional Board member for Corporate Finance, said: "The pilot transaction has demonstrated that the issuing as well as the trading of securities can be simulated in real time via Blockchain technology. Transforming securities transactions into digital issues may open up significant potential for efficiency gains."
Dr Frank Wellhöfer, Managing Director for Investment Controlling, Back Office and IT at MEAG, said: "This project has allowed us to analyse from an investor's perspective the impact of Blockchain technology on front and back-office processes, and regulatory aspects. The future belongs to digital business processes. The potential efficiency gains and cost benefits are already highly attractive when looking at existing processes; the opportunities offered by the further development of our processes promise additional revenues for our clients."
Dr Frank Czichowski, Treasurer of KfW, said: "Advancing digitalisation will have a significant impact on the manner in which financial markets transactions will be traded and settled in the future. As a major player on the international money and capital markets, KfW believes that Blockchain technology holds significant potential. With this pilot transaction, we have been able to gather initial positive experience in practice. Looking forward, we anticipate benefits in terms of settlement speeds, transparency, and high security standards."