John O'Neill, HSBC'S global head of digital assets strategy, speaks to Sophie Downes about the firm's recent digital endeavours and their significance for the future of the digital market transactions
“Repo is one of the cornerstones of a liquid bond market,” according to John O’Neill. “As digital asset markets develop, Hong Kong is leading the way.”
February 2024 did indeed mark a period of vast endeavour for HSBC, and also a moment of personal pride for O’Neill, as the company’s global head of digital assets strategy.
The start of the month saw the completion of the bank’s multi-currency digital bond offering. This success laid the foundation for a HKD repo transaction on 27 February, in which digital bonds were used as collateral.
As one of the world’s largest financial institutions, with global roots stretching far beyond their Hong Kong base, innovation is imperative to the work HSBC are doing.
HSBC Orion
The completion of the bond issuance encapsulates the growing power of digital platforms and technology in the industry.
In this particular case, the developments were facilitated by HSBC Orion, a platform launched by the bank in 2022, which enables financial institutions to issue blockchain-based versions of financial assets.
HSBC Orion is operated through the Hong Kong Monetary Authority's (HKMA) Central Moneymarkets Unit (CMU), enabling digitally native bond issuance via the CMU system. This means that conventional bonds are not issued into the CMU and tokenised on a separate blockchain platform, but are directly issued onto HSBC Orion's private permissioned blockchain.
Tokenisation is the process of issuing a unique, digital representation of a real product. Tokens can represent physical assets such as real estate or art, financial assets including equities or bonds and intangible assets like intellectual property. While HSBC Orion facilitated the issuance of bonds in this case, there is potential expansion into other digital and tokenised assets in the future.
O’Neill explains how integrating the Orion platform into the CMU enables the transaction to benefit from longstanding CMU linkages with international central securities depositories (ICSDs). “The landmark transaction has opened up an unparalleled range of investor access options, which is key to driving liquidity in digital bonds,” he adds.
These digital bonds were issued through the Orion platform as part of a HKD 6 billion (US$760 million) equivalent digital native green bonds issuance. Not only did this represent the largest digital bond issuance to be completed globally, it was also the first multicurrency digital bond issue, across HKD, CNH, USD and EUR currencies. This permitted HSBC to conduct a HKD repo transaction with the Bank of East Asia on 27 February, using digital bonds as collateral.
Tradition and tokenisation
Introducing a digital bond is not done overnight.
In February 2023, Hong Kong issued its first tokenised green bond, a HKD 800 million issuance using the Goldman Sachs Digital Asset Platform (GS DAP). While the HKMA affirmed their support for tokenisation in its Bond Tokenization in Hong Kong report in August 2023, they argued greater interoperability was needed for future tokenised bonds.
O’Neill describes how the team began working on the project from the mandate in the summer of 2023. It becomes apparent that this was no easy task, predominantly due to the challenges of placing a natively digital platform in Hong Kong. "We went for what we regarded as the ideal situation, so that investors find digital bonds as easy to access as conventional bonds — they do not have to use new accounts, they do not have to create wallets or tokens,” he explains.
Fortunately, these efforts proved fruitful. O’Neill details how HSBC initially employed the account structure of Hong Kong’s CMU, before incorporating linkages to ICSDs , including Euroclear and Clearstream. “When it came to pricing these bonds, there was a lot of demand, it was as easy to access as a conventional Hong Kong bond, and we have seen secondary liquidity and repo since,” recounts O’Neill.
A gold standard?
Eugene Ng, managing director at HSBC’s Hong Kong office, stated the transaction would establish “a new benchmark for future digital bond issuances, setting the gold standard in the industry”.
So why is this bond issuance so significant, and what does it mean for future digital bond issuances?
A significant impact is the opportunities it creates for investors. HSBC reports, in insights published on the company website, that it has seen “unprecedented investor demand to-date for a digital bond with over 50 global investors”.
Meanwhile, the repo transaction with the Bank of East Asia highlights how digital bonds can now be used for short-term financing purposes — another sign that the market is maturing. Bryan Wong, general manager and head of the treasury markets division of the Bank of East Asia, spoke of the ‘smooth’ process of transacting repo trades using bonds as collateral: “This repo transaction marks a significant milestone in building liquidity for digital bonds, while reinforcing our bank’s support for the development of Hong Kong dollar capital markets.”
Another advantage of digital repo is the speed and ease of the transaction. A shorter settlement cycle reduces both market and liquidity risk in the length of exposure to trading counterparties as well as lowering the margin requirements for clearing members. HSBC notes that the settlement period for conventional bond issuance in Hong Kong is T+5. However, this digital bond issue settled on T+1, illustrating the benefits of digitalisation of bond issuance and settlement.
Indeed, perhaps the greatest significance of the bond issuance is the fact that it is an actioned, settled transaction within a topic that is surrounded by discussion and buzzwords.
“This is not a model,” O’Neill emphasises. “This infrastructure is suitable to be used by other issuers, and there is already strong interest in using it, because issuers and investors have seen the liquidity that can result.”
In short – it works.
Forging ahead
On the tails of the team’s success, O’Neill remains firmly focused on the next project. The immediate next step, he shares, is working to facilitate more digital bond issuances on the Orion platform.
The team is focused on building strong capabilities across the bank within digital assets and blockchain technologies. Specifically, it is looking to expand the range of digital assets it can tokenise. In December 2023, HSBC Holding introduced tokenised physical gold trading on its single-dealer platform, an offering which O’Neill suggests he wants to explore further.
2024 will also witness the launch of HSBC’s digital asset custody service for institutional clients that invest in tokenised securities. Once up and running, they hope it will complement HSBC Orion to form a complete digital assets offering for institutional clients.
The completion of the bond issuance evidently warrants optimism, both for HSBC as it makes strides in the digital ecosystem, but also for an industry confronted with increasing discussion of digitalisation. We are witnessing, in real time, the beginning of an industry wide transformation.
