What is the current strategy and value proposition of HSBC Orion as a digital bonds issuance platform and how does it add value to the current ecosystem?
Jamie Anderson: J.P. Morgan Tri-party recently connected to HSBC Orion, our digital assets platform, facilitating a first in the market for a triparty repo transaction involving a digitally native bond.
We are really excited about how this development will help drive the growth of digital bonds. J.P. Morgan Tri-party’s nexus provides bond investors with a network of repo buyers, who can receive digital bonds as collateral in return for financing.
Through HSBC Orion, we are one of the few global banks positioned to support both digitally native bonds and tokenised assets. HSBC Orion covers the complete digital asset lifecycle — from issuance to settlement on a private, permissioned blockchain — leading to shorter settlement cycles and lower operational costs for the issuer.
Regulated under either the Luxembourg or Hong Kong legal and regulatory framework, HSBC Orion bridges the emerging digital assets ecosystem with the access routes of traditional markets.
To date, over US$1.5 billion of digitally native bonds have been issued via HSBC Orion across supranational, central banks, financial institutions, and corporate sectors.
With J.P. Morgan’s Tri-party service and its network of collateral receivers now connected to HSBC Orion, this will help drive further liquidity in the digital bond market through access to repo financing on HSBC Orion itself.
Eligible investors can also access digital bonds that have been issued on HSBC Orion through custody accounts held with direct participants of HSBC Orion, including J.P. Morgan, HSBC or BNP Paribas, thereby widening market access.
With respect to the latest repo transaction that utilised digitally native bonds on HSBC Orion as collateral through J.P. Morgan as triparty agent, how does it help reduce demand constraints?
Anderson: HSBC Orion recently demonstrated the success of the first digital bond repo transaction carried out between HSBC entities using J.P. Morgan as the triparty agent. The trade demonstrates the capability of the HSBC Orion platform, and we expect further interest from investors looking to finance their digital bonds. The integration marks a foundational step toward seamless interoperability between traditional finance and decentralised infrastructure.
J.P. Morgan initially connected to HSBC Orion in Luxembourg as a direct participant, providing eligible custody clients access to digitally native bonds on HSBC Orion. This connectivity also enabled J.P. Morgan, in its capacity as triparty collateral agent, to offer a financing solution for digitally native bonds to investors and connect them to a network of repo buyers. The approach alleviates demand constraints by making digital bonds more liquid and enabling their interoperability as collateral for deployment across multiple venues, margin calls, and repo transactions.
According to Boston Consulting Group, digital bond issuance is projected to reach US$800 billion by 2030, signifying the potential amount of these types of digitally native bonds that could be used as collateral in repo financing. The ability to finance digitally native bonds is a crucial step in adding a substantial and new pool of collateral as the predicted growth of digitally issued assets comes to fruition.
What technological innovations, such as DLT, are triparty collateral managers leveraging to enhance the use of digital bonds as collateral?
Graham Gooden: In the capacity of a triparty agent, we see digital assets and the use of distributed ledger technology (DLT) as a natural extension of our key role in the collateral ecosystem.
Triparty can be used in many facets and interfaces with emerging DLT platforms — whether using digitally native bonds, or aggregating financial assets that can be tokenised, for intraday financing purposes via repo transactions.
In many ways, by connecting to new digital platforms and leveraging their existing functionality and network of participants, triparty agents can act as that important ‘translation layer’ between traditional and new technology.
From a triparty collateral manager perspective, how do you view digital assets, and how does J.P. Morgan fit into this part of the landscape?
Gooden: It is our expectation that digital assets, and use of blockchain and DLT, will increasingly become part of the securities services landscape, and has the opportunity to drive transformational change.
J.P. Morgan Â鶹´«Ã½ Services is committed to supporting our clients in their exploration and understanding of digital assets and blockchain technology, and is actively working with clients and industry partners, such as HSBC Orion, to develop solutions for institutional use cases.
A key driver for the adoption of digital assets, which are currently issued across multiple platforms, is to build interoperability with traditional financial services to deliver necessary liquidity and scale. Being able to reuse digital assets as collateral, enable refinancing or enable custody of these assets alongside traditional securities, is important and necessary to drive secondary market liquidity and adoption.
From a triparty collateral manager perspective, adding digital assets to the breadth of financial instruments can only expand the supply and diversification of collateral our clients are able to finance.
How do you ensure compliance with regulatory requirements and risk controls (e.g. concentration limits, haircuts) when managing native digital bonds as collateral?
Anderson: HSBC Orion has in place robust control frameworks for digital assets to meet regulatory requirements. Collateral providers and collateral receivers wishing to post or accept digital bonds as collateral are required to complete the Collateral Management Service Agreement and Digital Â鶹´«Ã½ Annex and update their eligibility schedule to accept digital assets.
HSBC also engages with industry bodies such as the International Capital Market Association (ICMA), the International Â鶹´«Ã½ Lending Association (ISLA), and the Association for Financial Markets in Europe (AFME) to align best practices and foster broader adoption of digital bonds. Working closely with regulators ensures alignment and compliance with emerging standards for digital assets.
Gooden: J.P. Morgan in its capacity as a triparty agent has built up a good cadence of adding on new markets to its triparty ecosystem. We approach the addition of digital bonds in a similar fashion, augmenting existing frameworks for due diligence of new markets with internal expertise for new technology. As you would expect, any extension of our servicing to new infrastructure or markets is overseen by our rigorous change management process.
We are not reinventing the wheel but leveraging what works well in today’s market. That includes leveraging existing industry standard messages and report formatting. This reduces the cost and increases the speed of adoption across a broad network of participants.
Could you discuss the potential impact on liquidity and collateral supply if more market participants adopt digital bonds via triparty collateral management?
Anderson: Integrating digital bonds with J.P. Morgan’s triparty collateral management ecosystem via HSBC Orion adds to HSBC’s collateral distribution capabilities for providing repo financing to our clients in an efficient and scalable manner.
Digital bonds can be used as collateral by investors to gain leverage for their own investment strategies, which in turn could drive more digital bond issuances and unlock the growth of this asset class.
J.P. Morgan Tri-party effectively acts as a ‘collateral bridge network’ to HSBC Orion, linking our platform to a traditional network of repo buyers and acting as a catalyst for collateral mobility of digital bonds.
Operationally, the benefits of holding digital bonds can be combined with the full suite of existing triparty functionality, including standard existing messaging, reporting standards, pricing, reference data, and collateral testing, thereby enhancing collateral velocity
What challenges remain in fully integrating digital bonds into triparty collateral workflows, and how are these being addressed by the industry?
Gooden: The broad industry interest in digital assets is clear, but the pace of change will vary from firm to firm. That will depend upon a firm’s priorities and whether it feels more comfortable being a leader or following others once the digital asset ecosystem is more established.
Adoption of market standards and greater consistency of operating models across digital platforms and token structures will also help to increase participation in digital asset platforms, by reducing barriers to entry.
By integrating digital bonds into the standard triparty infrastructure, we have the benefit of being able to switch on functionality automatically to clients at their request. Thereafter, clients have the option to accept digital assets once they have completed their own due diligence and executed the necessary documentation. Digital bonds can be pooled and financed with traditional securities or ring-fenced to specific accounts or counterparties.
Looking ahead, how do you envision the evolution of a securities financing framework in supporting a broader and more efficient collateral ecosystem through digital assets?
Anderson: While digital bonds represent the next evolution in capital market infrastructure, unlocking their use for repo transactions within the securities financing framework will in all probability increase demand from investors for this asset class.
As DLT-based products scale, we believe collateral eligibility of digital securities will be used by central banks and central clearing counterparties as part of their collateral requirements.
The combination of automated processes, increased pools of supply, and enhanced precise settlement capabilities, could help investors manage digital assets more efficiently and therefore potentially meet collateral obligations on a 24/7 basis.
Gooden: Across the industry, firms have robust due diligence protocols and a long list of competing priorities, which can act to slow down critical mass adoption of digital bonds. But at some point we expect to see a tipping point in adoption which is then likely to become self-fulfilling by driving further digital asset issuances, in turn increasing the available inventory to be financed.
In the long term, the true benefits will only be realised as legacy systems are retired. To use a previous evolution as an example, when I first worked in the City of London, physical vaults and paper bond certificates were used widely. Electronic bond certificates have almost entirely replaced paper, and we now see emerging digitally native bonds that use the efficiencies of DLT as potentially the next chapter.
Next interview →
DNB Carnegie
J. Kenneth Hage
Image: Graham Gooden and Jamie Anderson 