A blog series on blockchain in capital markets. Part 3: Digitising bond lifecycle

Corda Nov 09 2022 By: Divya Taori
Comments

0 Comments

Views

319 Views

A Blog Series on Blockchain in Capital Markets, Part 3: Digitising Bond Lifecycle
Divya Taori
Divya Taori Blockchain Development (Corda Open Source)
Share this post:
Copied

Underneath the blasting coverage of the stock market, there is a whole other side to public companies out there – the bond market – the corporate bond market, where companies go to borrow cash. This bond market is a marketplace for debt-based assets. Federal governments, municipalities, and corporations issue bonds, debt securities, and debt derivatives to borrow money from investors. These issuers may use this raised money for different reasons ranging from making social security payments, building the road infrastructure, or funding a new project. Such transactions benefit both parties in the way that the issuer raises money to fund its projects while the investors receive interest on their initial capital payment. Now, as an investor, you can either invest in fresh debt assets via the primary market or exchange debt instruments in the secondary market of the bond market.

In terms of scale, the bond market is much bigger than the stock market by multiples. As of 2021, the size of the bond market (total debt outstanding) is estimated to be at $119 trillion worldwide and $46 trillion for the US market, according to the Securities Industry and Financial Markets Association (SIFMA).

The majority of this institutional-grade trading in the corporate bond market is still conducted by phone. The current infrastructure of the bond lifecycle comprises multiple separate work streams that have traditionally been split into separate silos. Each silo requires continual manual inputting and a need for repeated reconciliations. This in turn leads to increased costs, and reduced speed and exposes processes to security errors and vulnerabilities at times resulting in fraud, theft, etc. Additionally, such a siloed architecture prevents easy collection, integration, processing, and analysis of the collected data. 

Now imagine a scenario, where these siloed systems could be integrated all together in a seamless way using a distributed ledger platform. The entire lifecycle of bonds from inception to redemption could be digitized. The asset and settlement tokens representing this asset class are issued on the DLT ledger. These tokens sit natively and securely on the DLT platforms ledger and this ledger acts as the single source of truth for all participants in the market. Bonds are digitally signed and available to all participants in the deal, eliminating the need for manual inputs, costly reconciliations, and a centralized data resource. All stakeholders have a comprehensive view of their holdings, trades, etc. 

The benefits of the above-mentioned digital bond lifecycle tokenization extend to easy trading and a comprehensive individual view. It eliminates reconciliations that have traditionally been manual and improves the overall data sharing on the platform. Ultimately, the process inadequacies are reduced to provide faster and scaled issuance, quick trading, and settlement while also improving transparency alongside reducing and mitigating operational risks because of the inherent trust and security that comes with Distributed Ledger Technology.

Following the tradition of all my earlier posts in this series, this post should also point you to real-life implementation. A landmark example was pioneered by the World Bank, which began issuing debt in the form of “i-bonds” in 2018. Since then, the international financial institution has enhanced the capabilities of its platform by allowing trading in secondary bonds registered in the blockchain for bonds. The second example in this list is Agora. Agora is a platform that automates the bond lifecycle from inception to redemption. Lastly, an important example that is very well worthy of mention is the SIX Digital Exchange, where the first digital bond to be issued in a regulated market was issued in Nov 2021.

That’s all for this blog post on digitizing the bond lifecycle through DLT. If you have missed reading the earlier blog posts in this series, please find the links below:

Part 1: Private Markets
Part 2: Syndicated lending 

Stay tuned for my next blog post in this series. 
Until then, happy learning!

Divya Taori
Divya Taori Divya Taori is a Developer Evangelist at R3, an enterprise blockchain software firm working with a global ecosystem of more than 350 participants across multiple industries from both the private and public sectors to develop on Corda, its open-source blockchain platform, and Corda Enterprise, a commercial version of Corda for enterprise usage.

Leave a Reply

Subscribe to our newsletter to stay up to date on the latest developer news, tools, and articles.