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The Case for Collateral Mobility in Europe & The UK using Money Market Funds

GDF is pleased to announce the launch of its latest report co-authored with Ownera, EY and Hogan Lovells. ‘The Case for Collateral Mobility in Europe & The UK using Money Market Funds’.

The results of a working group reported on the legal certainty of collateral eligibility and the mobility of Tokenized Money Market Funds (TMMF) in Luxembourg, Ireland, and the UK. Ireland and Luxembourg host more than 80% of the MMFs and cross-border funds in Europe and English law governs the Credit Support Annex (CSA).

The report concludes:

  • There is relative legal certainty of TMMFs located in Luxembourg in a digitally native or registered form due to the availability of statutory frameworks to govern such transactions
  • Longstanding historical legal interaction between Luxembourg and the UK in respect of financial and investment contractual arrangements, including CSAs, also makes this an attractive place to establish a TMMF where the tokens will be posted as collateral under a CSA governed by English law
  • There is not yet express statutory or judicial authority in Ireland specifically addressing tokenized shares or TMMFs. Legal certainty in respect of ownership and treatment of tokenized shares under Irish law therefore requires an analogy to traditional shares and electronic contracts, rather than being directly established
  • It is reasonable to conclude that Irish courts would treat digitally native TMMF shares in a manner consistent with traditional shares. This alignment reinforces the view that TMMF shares can be accommodated within existing property law principles in Ireland, supporting their recognition and enforceability under Irish legal standards
  • Where an MMF is tokenized using a digitally native TMMF and is located in the UK, there is a low degree of legal uncertainty concerning the legal treatment of ownership and a similarly low level of uncertainty concerning the replication of rights for market participants between the traditional MMF and a digitally native TMMF
  • It is anticipated that further certainty will be available in the UK if the Property (Digital Assets etc.) Bill is enacted and common law precedent is developed as to the implications of the “third category” of property.

Over 70 firms participated in the working group including S&P, Federated Hermes, R3, JP Morgan, Ownera, Finastra, Lloyds Banking Group, Hogan Lovells, LSEG, Archax, Blackrock, State Street, ISDA, EY, Commerzbank, Fireblocks, Northern Trust, Apex Group, Franklin Templeton, and Goldman Sachs.

As part of the working group 30 of the firms participated in the GDF Industry Sandbox, powered by Ownera, the firm which operates the FinP2P routers that implement the open FinP2P standard to “prove” the production use case for collateral mobility in TMMFs.

With no fundamental barriers identified across legal, operational and regulatory dimensions, the sandbox demonstrated that TMMFs can transition from theoretical use cases to a production-ready collateral instrument across six simulations:

  • Simulation 1: Simple Bilateral Transfer – Manual Margining of TMMFs
  • Simulation 2: Integrated Margin Calls – Automated Posting via Third-Party Systems
  • Simulation 3: Depeg Event and Substitution – Dynamic Portfolio Management
  • Simulation 4: Default Scenario – Enforcement and Recovery in Insolvency
  • Simulation 5: Funding of TMMF in Triparty
  • Simulation 6: From SWIFT to Collateral Settlement in Seconds.
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