The trial is being conducted by the bank and the exchange to determine the potential of the technology in terms of reducing friction in issuing and receiving of fixed incomes through bonds. Fixed income securities are a kind of debt bond in which a predetermined amount of interest is paid to the owner, regardless of the performance of the company. The exploration is specifically focused on the Asian market.
The Asian market has seen a high rate of growth. However, the new heights are still affected by the age old issuance and distribution system, spread across different entities. This makes it difficult to share data and track the bonds as they are sold and bought till they reach maturity. HSBC and Singapore Exchange intend to use permissioned blockchain, essentially a private system that will be supported by the investment company Temasek.
The use of decentralized ledger technology such as blockchain will enable to reduce issues in the issuance and tracking of bonds, helping cut down costs for issuers, investors, bond floating etc.
The trial will determine if using the modern technology will be useful. HSBC Singapore CEO, Tony Cripps said, “Only by collaborating with market participants will we fully understand its actual viability”. Lee Beng Hong, the head of fixed income, currencies and commodities at Singapore Exchange also reflected the same,
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.
HSBC Loves Blockchain
HSBC is a bank that is a large proponent of using modern technologies in financial systems. The bank has already claimed that it has successfully used Voltron blockchain to reduce cross border payment time by up to 40%and used the technology for USD 250 billion in ForEx transactionlast year. The Senior Vice President of HSBC, Jesse Drennan even requested the Commodities Future Trading Commission of the United States to at least encourage entities to look into the use of the technology,
It would also be beneficial if the CFTC would give some positive words around DLT and DLT adoption,” and “Certainly there is a sensitivity to how the regulator may feel about such technology and supporting the activity that the parties are rolling out.
If the test run by the bank and the exchange shows that there is indeed benefit of the technology, this could revolutionize the current system which, although adapting to new technologies, still essentially works on decades old systems that are currently overloaded and full of inefficiencies.