The underlying infrastructure for registering and storing securities, on the other hand, seemed out of date. But that is about to change.
Deutsche Börse has set up a new digital platform on which digital securities can be issued in Germany for the first time from November. “The securities business in Germany will be much more efficient and faster,” said Deutsche Börse board member Stephan Leithner to the Handelsblatt. “This is an important step in the digitization of Germany and increases the international competitiveness of the German capital market.”
Until now, issuers have had to deposit paper-based certificates of securities with the Deutsche Börse subsidiary Clearstream. Clearstream employees check the documents, file them in folders and then keep them in a large safe.
However, the days for the antiquated practice are numbered. The basis for the change is the law on electronic securities (eWpG), which came into force in June. For the first time, it allows corporate bonds, certificates, warrants and other warrants, Pfandbriefe and certain fund shares to be issued as digital securities.
Deutsche Börse worked closely with large issuers such as Deutsche Bank, DZ Bank, Deka, BNP Paribas and Vontobel to develop the so-called D7 platform. DWP Bank, the Austrian Raiffeisen Bank International and large US institutes such as Goldman Sachs were also involved. Technological support came from, among others, Microsoft, the digital company VMware and the US companies Digital Asset Holdings and R3, which specialize in blockchain technology.
Investors can hope for lower costs
Stock exchange board member Leithner is convinced that the introduction of electronic securities is positive for all players in the financial market. “Over time, the higher efficiency in the financial system will lead to lower costs,” says the Austrian manager of the Dax group. “The financial institutions can pass these savings on to private and institutional investors.”
In addition, according to Leithner, the range of structural products will get bigger and better. “In the future, issuers will be able to launch new products that reflect current market prices even faster.” Today, most securities take one to two days before they are admitted to trading. “With digital securities, we will in future be able to do this within a day, with some even within a few minutes,” says Leithner.
This is particularly important for time-critical types of securities such as certificates, which, for example, are based on a certain DAX price. Today, many of these certificates are never traded because the DAX price changed noticeably during the approval process.
From November, issuers at Clearstream will initially be able to digitally issue simple securities – for example a three-year promissory note with a fixed interest rate. “By July 2022, more and more complex financial instruments will be added step by step, for example knock-out certificates,” explains Leithner. These are leverage products that become worthless if the price of a share or another underlying asset breaks through a predetermined threshold.
All financial products should digitally store what can happen in the life cycle of a security – for example, when a bond can be canceled or under what conditions a security becomes due or worthless. If these cases occur, this is booked fully automatically for digital securities.
Exchange trading in Germany has long been mostly electronic. When issuing securities, companies still have to deposit documents in paper form with the Deutsche Börse subsidiary Clearstream.
According to Leithner, the financial products covered by the eWpG correspond to around 80 percent of all securities that can be traded in Germany. Around 80 to 90 percent of this should be able to be issued in electronic form at Clearstream by summer 2022. “The majority of the German securities business can be digitized by the middle of next year,” explains Leithner.
However, shares are not covered by the Electronic Securities Trading Act and must therefore continue to be deposited with Clearstream in paper form for the time being. “If the legal regulations were to be changed, we would of course also support the issue of electronic shares,” emphasizes Leithner.
Deutsche Börse will also continue to offer analogue registration and custody for securities that can be issued digitally in the future. When it comes to new issues, however, in Leithner’s point of view, banks have “a high incentive to rely on electronic securities because this makes it easier and faster for them to process transactions”. The 55-year-old also expects long-term corporate bonds and fund shares to be converted from analog to electronic securities.
So far, certain master data of the security has been transferred from the certificate in paper form to the settlement systems of Deutsche Börse. The issuers usually work with a different range of data. Since these are incomplete, electronic copies of securities, comparisons between the data records and the original documents have to be made in paper form over and over again.
“That is obviously inefficient,” says Leithner. In future, the digital copy of a security will therefore be the original. “All those involved can query this data record in our digital register at any time. The need for reconciliation, which exists continuously today, is no longer necessary. “
Deutsche Börse wants to take market share from competition
From 2022 it should also be possible to register exchange-traded financial products based on blockchain technology with Clearstream. “That is why we want to establish connections to the FundsDLT fund platform in Luxembourg and to our partner company HQLAX, which offers securities lending on a blockchain basis,” announced Leithner.
With the eWpG, Germany has caught up with other EU states such as Luxembourg and Ireland, where the issue of electronic securities has been possible for a long time. With the new set of rules and the D7 platform from Clearstream, however, Leithner believes that Germany is now well positioned – and the manager hopes to gain market share in Europe with the help of D7.
“We are confident that, thanks to the new digital platform, we will be able to attract more business from other European countries to Frankfurt,” says the board of directors of the stock exchange. After all, there is no digital offer like Clearstream’s in France or Italy.
The D7 project is of great importance to Deutsche Börse, after all, Clearstream is the group’s second most important division after the derivatives exchange Eurex. In the first half of the year, Clearstream generated net sales of 428 million euros and an operating profit (Ebitda) of 242 million euros.
In the future, Leithner sees the opportunity to use the new platform to penetrate into “additional classes of securities” that have not yet been registered and held with Clearstream. This includes, for example, large parts of the derivatives business and bilateral loan agreements.
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