the case for tokenisation
Issuers
2000 tasks removed today, better investor visibility tomorrow
The case for automating securities issuance is increasingly well-documented – as is the product roadmap for issuers. Start with structured products (such as warrants) and move onto Medium Term Notes or Commercial Papers – where issuance volumes may run up to 30,000 contracts per day - but the number of institutional counterparties is still relatively low. After those, move onto corporate bonds.
But whilst the benefits of these early tokenised deals have centred largely on near-term benefits of process automation and instant settlement, it is quickly becoming clear that the benefits extend well beyond the back office.
Accelerated information relay
"Our pilot issuance highlighted efficiencies across around 2000 issuance tasks"
During the issuance of Olam’s tokenised bond in Singapore, HSBC quantified the efficiency gain through the automation of around 2000 manual issuance tasks.
Almost all of these gains centred on the use of smart contracts to both improve information relay between counterparties and to automatically trigger processes on the path to issuance – reducing issuance cycles from around six weeks to “T+1 hour”.
This landmark shift in resourcing and times has clear and immediate impacts for all profiles of issuers (and their service providers). Product issuance is becoming cheaper and more accessible to all.
Reduced settlement risk
"Issuance is almost always done on an FOP basis – but it doesn’t need to be"
Many issuances have also highlighted the value of instant distributions of securities through the issuance process. With large number of primary allocations being settled on a free-of-payment basis today, the balance sheet cost to issuing banks has been significant. By moving all of these payments towards an instantaneous delivery-versus-payment (DVP1) basis – and hence shortening the overall settlement cycles - issuing banks have been able to significantly reduce the capital cost of issuances – as HSBC, BNP Paribas and SG Forge have all shown.
Intraday product design – driving investor appeal
"If you have to decide on product specifications 2-3 days in advance then you face the risk of early knock outs and reduce your ability to actually sell your products"
But there is more to the value of this information relay than just the cost of time. Whilst initially viewed as a mechanism to reduce costs and legal fees, tokenisation is quickly proving its value in giving issuers much more market agility.
With the ability to issue (structured) products intraday, Clearstream’s D7 is giving product designers the first chance to design their issuances to map exactly against current market conditions – and hence maximise their investor appeal. Reduced chances of knock-outs and optimised product design.
Balance-sheet benefits of real-time pricing
“Bond issuance can be a 6 week process but the pricing is just done on one day”
Able to track pricing throughout the process, subscribers to structured product or bond issuances can optimise their use of funding and capital throughout the issuance process – removing the need to provision and freeing up capital to be re-used elsewhere in the bank.
Golden source of information – more than data management
"Through tokenisation, the nature of the security will change. The security will become a digital object – which will be the golden source to a community of users."
Much has been said of tokenisation’s value in providing a golden source of truth. With a single, distributed, real-time ledger, there is no scope for information distortions and hence no need for (manual) reconciliations across our different trade flows. Billions of dollars in point-to-point reconciliations can be removed across the industry.
But less discussed how this single ledger (and the absence of data corruption) drives trust and – with it – the ability to automatically program securities to act based on specific data inputs (such as interest changes or ESG conditions)
As D7 is beginning to demonstrate, digital securities mean a golden copy; and a golden copy means programmable, self-administering securities which can change the way our capital markets function.
Stepping out of the security lifecycle
"Tokenising issuance means that the issuer can step out of lots of processes and tasks like coupon payments"
Whilst much focus is on the cost benefits of issuing the security, the benefits of tokenisation to issuers extend throughout the security lifecycle.
A prime example is in the creation and management of coupon payments for bonds. In a tokenised environment, these highly programmable and largely standardised events no longer require anything more than a cursory approval by issuers. Programmed and automatically triggered, these events no longer require manual resources to book-keep, to trigger payments and to reconcile transactions – leaving issuers (and their agents) free of the operational and risk burden of handling these events.
From investor visibility to investor management
"DLT gives issuers a say on how their securities are distributed"
Beyond these early savings, it is increasingly clear that the true value of tokenisation for issuers lies in the relationship that they can begin to forge with their investors.
Using live tokens today, issuers have begun not only to understand who owns their securities, but to take an active role in managing share ownership (going beyond simple sanction screening and limit monitoring to detailed counterparty analysis).
For (private and listed) equities, this can potentially stretch throughout the security lifecycle into a highly bespoke relationship with shareholders – including customised corporate actions and tailored terms for new issues based on voting engagement or counterparty exposures.
Issuers are shifting from passive managers of their issuances to active managers.
A new generation of securities
Leveraging the sophistication of a blockchain’s data capabilities, issuers and banks are also bringing to market a whole new generation of programmable securities – whose value can be precisely managed and calculated on the basis of highly complex data inputs.
Green bonds, carbon credits and sukkuks are all leading examples of complex, data-driven securities whose market value relies on the issuer’s ability to demonstrably meet certain criteria (e.g. green credentials, carbon removal, etc.). As Bursa Malaysia and Xpansiv have shown, tokenisation is not just valuable for these new asset classes – it is an indispensable foundation in delivering trust and value to issuers and investors.