The road ahead

Guido Stroemer, CEO and Nick Short, COO of HQLAX outline the key elements of the firm’s product roadmap. 

HQLAX’s core clients are financial institutions active in securities lending and collateral management. Our platform enables market participants to transfer ownership of securities seamlessly across disparate collateral pools at precise moments in time, which allows participants to optimise their liquidity management and collateral management activities, generating operational efficiency gains and capital cost savings.

In June we added J.P.Morgan as a strategic investor in our Series B funding round. This follows on from the $14.4m Series B funding we secured from BNY Mellon, Goldman Sachs, BNP Paribas Securities Services, Citigroup and existing shareholder Deutsche Börse at the start of this year.

This funding will be used to accelerate the core premise of our platform – helping the industry address European collateral fragmentation by extending its connectivity to leading tri-party agents, custodians and market participants.

Not only is the financial backing substantial, but the public commitment from our new investors to connect to our platform is validation of our shared vision to accelerate collateral mobility across the global securities finance ecosystem.

We already have Clearstream, Euroclear and J.P.Morgan tri-party connected to the platform and by the end of this year we will have added Bank of New York and BNP Paribas tri-party as well as Citi as a custodian.

Over the course of 2021 we are building out an agency securities lending solution, which will enable borrowers to borrow securities from agent lenders and collateralise them using our model and using the advantages of simultaneous DvD. This is an extension of our existing model.

We are also working with a number of institutions on inter-company firm financing flows, which enable institutions to change ownership collateral freely between two entities of their parent structure – something that is of interest to a number of our clients in 2021.

We will connect to trade execution and post- trade reporting venues as and when we see fit and we are in dialogue with a number of these venues who would help support our operating model. We are already connected to Eurex, which provides the trade execution platform for our baseline product.

Looking further ahead we are also focused on helping institutions satisfy their variation margin requirements by enabling collateral ownership to move freely. All these developments will extend the use cases of our baseline product.

Beyond this we are already developing plans for how to exchange securities versus cash and to what extent our platform would interact with other forms of digital cash. What this provides is the ability to do repos and intraday repos - developments that will further broaden our potential client base.

Digital collateral records or DCRs are the record of ownership of securities that are recorded on our platform’s ledger. We are currently designing a prototype for a DCR dashboard to provide our clients with an overview of encumbered and unencumbered DCRs.

One interesting use case that we are pursuing with one of our clients is to leverage this dashboard to enable the client to transfer ownership of unencumbered DCRs between two of its legal entities on a 24/7 basis. We are also in early design stages for what we are calling a composite DCR (a single DCR to be collateralised with DCRs from multiple triparty locations) and to enable dynamic substitution of DCRs on a DvD basis.

We are currently in discussion with a major EU derivatives CCP to accept DCRs as record of ownership of baskets of securities to satisfy CCP initial margin requirements. We are also considering use cases in the OTC margin space, specifically related to mobilising money market fund units held in Clearstream’s triparty environment.

We are focused on Europe at the moment, although we work with a number of US institutions that are operating in Europe. Our target audience is market participants who need to change ownership of collateral that is located in Europe and once we have established the platform in Europe it would come as no surprise that we would be looking to extend it into other jurisdictions.

Our approach to this market has been to identify business problems and develop the technology to address them, but we are constantly innovating in terms of product use cases. Over the period of the pandemic we have seen an increase in client interest in using our solution to satisfy variation margin requirements, driven by market volatility in 2020.

We spend a lot of time with our clients, going through the particular pain points they face. Clients often come to us with ideas and we are therefore in a unique position to identify pain points in the market that we can help address - our focus is very much on long term trends.

This article is part of the Collateral in 2022 Guide, and if you want to find more click here to download the guide.