Securities Finance Technology News | JP Morgan Processes Trade Settlement Using Tokenized MMFs as Collateral

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JP Morgan Processes Trade Settlement Using Tokenized MMFs as Collateral

JP Morgan settled its first trade using tokenized money market funds (MMFs) as collateral.

To support this collateralized trading, JP Morgan has released a new app on its Onyx Digital Assets blockchain, allowing trading participants to transfer tokenized MMF shares onto the blockchain as collateral.

The collateral provider and the collateral recipient must be present on this blockchain-based application, known as the Tokenized Collateral Network (TCN).

This facility allows participants to transfer ownership of the collateral without the need to transfer the underlying asset (in this case, the MMF securities).

A JP Morgan spokesperson told SFT that international asset manager BlackRock has played a central role in the development of this token guarantee initiative since its inception. However, BlackRock was not a counterparty in that initial transaction, which JP Morgan considers the world’s first to use tokenized MMF shares as collateral in a blockchain-based transaction.

The TCN is now live and participants can transfer tokenized monetary shares as collateral starting today.

Following this successful execution of a collateralized transaction using tokenized MMF shares, JP Morgan plans to expand this model to allow transfers of tokenized shares, fixed income securities and other assets as collateral.

“Our plan is for this [MMF] transaction, and the development of our token collateral application, to serve as a model for the future,” the spokesperson said.

The US-based bank has integrated its blockchain technology with traditional transfer agency and collateral systems, allowing institutional investors and asset managers to deposit a wider range of assets as collateral.

This version follows the development of JP Morgan intraday repo service on the Onyx blockchain which completed its first live transaction between its broker and banking entities in December 2020. This has now processed over US$300 billion in repo transactions since its release, according to JP Morgan.

Onyx, JP Morgan’s suite of Ethereum-based blockchain solutions, launched in 2020, providing a new business unit to scale and commercialize blockchain innovation. Shortly after, the company launched a new digital asset platform, Onyx Digital Assets, which enables the tokenization of traditional assets and the execution of delivery versus payment (DvP) or non-payment (FoP) transactions with these assets.

The token collateral application was jointly developed by JP Morgan’s Collateral Services team and Onyx.

Commenting on the project, JP Morgan’s Global Head of Trading Services, Ben Challice, said: “The collateral ecosystem is becoming increasingly complicated, and mobilizing collateral across the ecosystem is critically important. Across the industry, the physical settlement of assets to meet collateral obligations using aging infrastructure has become financially and human capital intensive. We can now offer participants the option to transfer shares of money market funds as collateral in the form of tokens, thereby increasing the liquidity of this asset class.

“This is a great moment for the collateral industry as it demonstrates that the technology works with an asset class that has historically been difficult to transfer, and we look forward to rapidly expanding the pool of tokenized assets.”

Tyrone Lobban, Head of Blockchain and Onyx Digital Assets (ODA), comments:

“The launch of the tokenized money fund solution is a watershed moment for the industry. Not only does this once again underscore the value that blockchain and tokenization can bring by moving assets at the speed of email, also shows the flexibility, scale and diversity of the Onyx Digital Assets platform.

“The first application on ‘ODA’ focused on providing innovative intraday financing solutions through repurchase agreements. This second application opens up the universe of assets that can be posted as collateral, reduces costs and improves settlement. This is a step change for dealers, asset managers and the broader warranty market.”

JP Morgan says the tokenization of traditional assets has the potential to significantly reduce settlement failures, provide near real-time ownership change, and release trapped assets to help participants maximize the use of their assets.

Ben Challice talks to Bob Currie about the development horizon for JP Morgan’s financing and securities guarantee services in SFT Number 300.

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