At a glance
- The bond was issued on a digital platform but remains linked to Euroclear’s existing settlement infrastructure
- Its hybrid model gives it the potential to attract wider adoption and achieve scale
- Issuance settled on a T+0 basis demonstrates the potential of distributed ledger technology to compress settlement times
Euroclear has issued the first bond on its new Digital Securities Issuance (D-SI) platform: a €100m digitally native note (DNN) from the World Bank’s lending arm, the International Bank for Reconstruction and Development. It was listed on the Luxembourg Stock Exchange.
While the bond was issued on the D-SI platform — the first key milestone in Euroclear’s Digital Financial Market Infrastructure (D-FMI) strategy — it remains linked to the clearing house’s existing settlement infrastructure. This means the bond can settle in the same way as a traditional security.
The result is that secondary market investors are all still granted full access. Without this link, the issuance would be siloed, effectively locking out any potential investors without distributed ledger technology (DLT) capabilities.
It is this hybrid model that gives it the potential to attract wider adoption and achieve scale, believes Antonio Queiroz, chief digital officer at Euroclear. “Our approach allows us to start balancing the bonds from legacy to the DLT in a non-disruptive way. DNNs remain equally available, tradeable and liquid for investors.”
Gabriel Callsen, director, fintech and digitalisation at the International Capital Markets Association, agrees this digital and traditional mix is compelling. “What is significant is that there is a bridge between the digital world — in the sense of DLT-based technology — and traditional market infrastructure,” he says.
A hybrid model with the potential to scale
The participation of Euroclear in this issuance is a clear signal about the future role of DLT in capital markets. “I think what’s really exciting is that you have an established market infrastructure, Euroclear — a cornerstone of the Eurobond market — adopting DLT. I think that sends a strong message,” says Mr Callsen.
He points to the fact that this could signal a real shift in the ability to scale: “I think the scalability in this case becomes much more realistic.”
The other key step in achieving scalability is compliance. This issuance is the first DLT security within an EU-based central securities depository capable of supporting securities governed by English law.
Corda, the ledger that underpins the bond, was specifically designed for regulated markets “from the ground up”, according to Todd McDonald, co-founder and chief strategy officer at R3, the firm behind Corda.
R3 and Euroclear have been exploring various initiatives and use cases in digital innovation and tokenisation for more than five years. The D-FMI was one such initiative. Mr McDonald says that “the use of its unique distributed architecture demonstrates its capabilities to support the issuance and primary distribution life cycle of a bond under an existing legal framework”. This existing legal framework, he adds, is applicable to an international central securities depository.
In other words: by using Corda, there is no need for regulatory change. Critically, this means that all future DNNs cleared in Euroclear’s D-FMI can be fully listed and traded on EU regulated markets.
Andrew Mulley, managing director, issuer services at Citi, the bank that acted as the issuing and paying agent, points out that “a large proportion of the assets within existing debt capital markets are already issued under English law. This issuance within that legal framework, therefore, is a great demonstration of how digitisation can be scaled.”
Could Europe leapfrog straight to T+0?
The bond raised €100m to support the financing of the World Bank’s sustainable development activities and was launched, priced, signed, closed and listed in a T+0 settlement process. Mr Callsen sees this as very significant. “If you look at the existing process in the settlement of international securities, there is a period where capital is locked up during the settlement period. Using this process, it becomes unlocked.”
But with Europe already struggling to keep up with the US transition towards T+1, does this model offer European settlement times the potential to leapfrog from T+2 straight to T+0?
In principle, yes. However, Mr Mulley believes that while the T+0 settlement of this issuance was a great demonstration of the potential for DLT to facilitate compressed settlement timelines and, along with better data, decrease settlement risk — the ability to replicate this settlement period at scale would require wide collaboration and co-ordination across the industry, as seen with the move to T+1 in the US.
“The US transition to T+1 will serve as a global impetus, however, guiding how global settlement operations are run for the foreseeable future,” he says.
In the immediate term, T+0 should be seen as an “additional funding option” rather than a wholesale alternative. Mr Callsen suggests that future issuances might even call for pre-funding, maybe even a day in advance.
Would this be T-minus-1? Whatever it is called, Mr Callsen says right now there is a balance between settling a transaction and for capital to be locked up before it settles, or pre-funding on a temporary ‘minus one’ basis. “I think, initially, this may be the case, but ultimately, the idea is that settlement will be done on a near-instant basis, so that we don’t have periods — either post-trade or pre-funding — where capital is locked up.”
