Can market participants truly benefit from digitalizing bonds with distributed ledger technology (DLT)?
That is a question that the HSBC Singapore is asking in a new trial that is set to be developed in partnership with Singapore Exchange (SGX) and investment firm Temasek. The potential of DLT will be examined through this effort so as to streamline the servicing and issuance of fixed income securities, debt instruments that pay fixed interest to investors, with a very specific focus on the Asian bond markets.
In an announcement that was made on Wednesday, HSBC sets out that although the Asian markets have experienced a speedy growth, issuance and servicing of the instruments still lacks efficiency without a single platform for sharing data between different entities and bond tracking across the lifecycle.
The aim of the trial is to address the shortfall by tokenizing bonds through smart contracts on a ledger that is permissioned with the intention of streamlining the processes and ease of friction in the markets. It is estimated that DLT might be able to cut costs for issuers, investors, bond arrangers and custodians, said the bank.
Already, the HSBC is deep in the DLT and blockchain space, after launching a number of projects that involve the tech and often speaking out in advocacy. Last year, there was a warning from the bank that “digital islands” could inhibit global blockchain-based trade. An executive also called on the U.S. Commodity Futures Trading Commission (CFTC) to make more “positive noise” about DLT in order to encourage businesses which are reluctant into using the tech.
Although all of this seems extremely bullish on the technology, HSBC Singapore CEO, Tony Cripps, argued that the potential of DLT to reduce inefficiencies in the fixed income market will still have to be determined. “Only by collaborating with market participants will we fully understand its actual viability,” he said.
“Having HSBC and Temasek on board will enable us to evaluate holistically whether smart contracts and DLT can solve some of the long-standing challenges in the fixed income issuance ecosystem,” said Lee Beng Hong, head of fixed income, currencies and commodities at SGX.