Digital securities: interview with Jens Hachmeister, Managing Director, Issuer Services and New Digital Markets, Deutsche Börse Group, on the D7 platform

In this blogpost we summarise a recent interview¹ with Jens Hachmeister, Managing Director, Issuer Services and New Digital Markets, Deutsche Börse Group, in relation to the D7 platform.

Background

1) Carolin: Many thanks for taking the time to talk to me about the D7 project today. Could you please briefly introduce yourself and tell us about your role?

Jens: I have been working at Deutsche Börse since 2000 in different management positions. Currently, my role is twofold: (i) group-wide, I am responsible for New Digital Markets and this also includes Deutsche Börse’s DLT initiatives and strategy; and (ii) at Clearstream I am responsible for issuer services, i.e. domestic issuances as German and Luxembourg CSDs with settlement by TARGET2-Securities (T2S) and international as ICSD, which is the home of Eurobonds together with Euroclear. Digitisation and the issuance of financial instruments are a good match as we want to digitise the life cycle of a financial product and this always starts with the issuance.

2) Carolin: New technologies like DLT are driving the transformation of the industry. What does this mean to you?

Jens: It is important to distinguish between, on the one side, technology which incrementally improves, and on the other side, transformational or disruptive technologies.  In the first case, an existing tool is replaced by a more developed or efficient one which, however, does the same thing. In the second case, “disruptive” means that it is changing the way value is generated in an industry – roles are changing and revenue sources are being redefined. For example, look at the transformation of the music industry – in the earlier days it was a live event, which you needed to attend to listen to music, then records, and then digital media such as MP3. Now, you can stream and share such digital media objects instantly via streaming platforms. In the world of securities, this means that a security becomes a digital object, i.e. the MP3 of the finance industry, administering itself over its lifecycle from the issuance to the final maturity.

3) Carolin: When and what caught your attention in regard to the DLT/blockchain technology?

Jens: My DLT journey started in 2017 with the Bitcoin hype and the ICO wave. Although there were a lot of scams in the unregulated markets at the time, I found the blockchain technology interesting and saw a lot of potential to transform the financial industry.

4) Carolin: What are the benefits of the D7 platform?

Jens: D7 will make securities markets digital. A smart digital object in a decentralised infrastructure will allow for instant and direct interaction and issuance, fluent markets, peer-to-peer trading and self-administration. It is an enabler to step up to WEB3 and allows the transfer of digital value.

Furthermore, digitisation will improve market efficiencies. A new technology has to fulfil at least one of three dimensions: to be faster, cheaper or more reliable.  Digital securities services markets will allow for instant issuance and distribution, peer-to-peer trading, a central or distributed registry, instant settlement and auto-asset servicing, custody and safe-keeping. Very different market participants will benefit from the same golden source of data, increased speed, reduced cost per unit and lowered cost of reconciliation.

You will not see one network dominating the world in the future, but some that build strong positions in interoperability and connectivity. D7 is designed to become a connector between different networks and stakeholders to create true interoperability.

Dematerialising financial instruments

5) Carolin: In December 2021, Clearstream launched the first component of the D7 platform in Germany, a new central register of Clearstream Banking AG, which forms the basis for issuance and custody of dematerialised securities (currently only applicable to bearer bonds (Inhaberschuldverschreibungen) and units in investment funds (Anteile an Sondervermögen)). This happened for the first time in Germany in compliance with the new legislation introduced on 10 June 2021 (Electronic Securities Act - eWpG). 
The central register is linked through Clearstream to the existing core European post-trade infrastructure (e.g. T2S). How long did it approximately take to develop such a platform from the start to the launch of the first component?

Jens: It took 12–18 months and was intensive work with a group of market participants. In order to launch there are a number of factors at play: the right regulatory framework which came with the introduction of the eWpG, mature technology enterprise solutions, market infrastructure and a high level of security and the market demands.

6) Carolin: What will change due to the dematerialisation of the securities in accordance with the eWpG?

Jens: It makes processes more efficient. Asset servicing is sometimes still manual, paper-based and done via various systems, which makes it more prone to errors and inefficiencies. We handle about 2 million issuances per year (active ISINs). 800,000 of them do not even make it to listing, but are, for example, knocked out before, which won’t be the case with a same-day issuance.

7) Carolin: The website indicates that the new platform allows for significant reduction of cost per unit and operational risks. Could you provide an estimate of how much lower costs or fees will be, compared with the ones for conventional bond issues?

Jens: There is no such exact figure because cost per unit decrease depending on the load on the platform. Furthermore, issuers of certificates and warrants have very different cost structures. For market participants, two more aspects might be relevant: due to same-day issuance with D7, issuances will become more effective; and the variety of new products and asset classes will increase over time. Also, entirely new products are likely to emerge, e.g. event-driven products, such as weather-dependent or even sports events. 

8) Carolin: Section 6 eWpG allows for global notes to be replaced by electronic securities and vice versa. Do you plan to make this function available soon?

Jens: With today’s eWpG framework, 80% of German ISINs can be dematerialised as of mid-2022. The final turnout depends on the issuers’ plan to on-board D7 and change to digital issuance.

9) Carolin: How many and what kind of market participants approached Clearstream and showed interest in piloting the D7 platform?

Jens: We are working with a broad variety of partners and clients, such as issuers, sovereigns, issuer agents/paying agents, asset managers, data providers, FinTechs, tokenisation platforms and dealer banks.

10) Carolin: How did the issuers submit their documents and relevant data? Did you (or do you) intend to make use of the D7 platform communicating back and forth?

Jens: There are different ways in which documents can be submitted to Clearstream. Some do it by e-mail, some directly over the platform by an API solution and others bring it over personally. From summer this year, only securities that are a “digital instrument” will be filed via D7. A digital instrument is the digital description of an electronic security in line with the eWpG. It contains the entire business logic and acts as a data container. Participants will also be able to create and submit a digital instrument themselves based on defined standards.

11) Carolin: Currently, one can look up securities in the public node by ISIN, product name, issuer name and issuer LEI. Do you plan to include more descriptors, i.e. searchable columns like “issue amount” or “maturity”, in the public node?

Jens: Yes, it will be extended. Throughout the course of this year we will see more types of bearer bonds and there will be more descriptors, and over time we will add new asset classes, i.e. funds.

Digitising financial instruments

12) Carolin: In accordance with the Electronic Securities Act (eWpG), electronic securities can also be issued via registration into a crypto-securities register (where no CSD is required). Distributed network and DLT capabilities are also a component of the D7 platform. When will it be implemented? And which DLT solution will you be using? 

Jens: This year there will be preparatory measures for our D7 distributed network capabilities. We are thinking of enterprise-grade permissioned protocols but of course market demand will decide.

13) Carolin: In which countries will the D7 platform be available?

Jens: Next to market demand, it is subject to respective regulation. We started in Germany, with the eWpG as the underlying regulation in place. Next, we are focussing on Luxembourg and other European countries. The drivers will be the Luxembourg Blockchain Acts and the European Pilot Regime.

14) Carolin: The DLT Pilot Regime aims to test the development of the European infrastructure for trading, clearing and settlement of DLT-based financial instruments. In a decentralised infrastructure, where financial instruments and payment will be fully digitised with DLT solutions, and where intermediaries for clearing and settlement services will not be required anymore (because of real time transactions and settlement via smart contracts), do you think that trusted third parties will still be required, and if yes, why? 

Jens: Trusted third parties will still be required because you cannot outsource trust to technology. Market integrity and investor protection is key. Clients and regulators still want direct contacts to engage with. In regulated markets, we will always have a regulatory framework and decentralised autonomous organisations (DAOs) won’t be accepted, as investors need to be protected. Each transaction needs to be defined in a rulebook and there needs to be an “adult in the room” for validation and enforcement.

15) Carolin: Will Clearstream be a crypto securities registrar (Kryptowertpapierregisterführer) in accordance with the eWpG? And what other services with regard to crypto assets are planned, e.g. the processing of crypto currencies via the D7 platform? How do you see your role in the future?

Jens: Our role remains as it is, to build, load and operate markets based on technologies within a regulated framework. At Clearstream we believe in our claim, “where innovation meets trust”: we will be a trusted operator of a decentralised market network and we can move beyond the CSD role and move into areas we do not cover yet.

16) Carolin: What are, in your opinion, the top 3 developments in the crypto space in 2022?

Jens:

1. The NFT market will further grow – NFTs are important if we want to move digital securities markets from digital global notes to digital single entries. 

2. The DeFi  (decentralised finance) market will further grow – there will be a new generation of finance products.

3. The Metaverse will further develop – we will see how digital offerings blur and connect and how hybrid worlds emerge.

Carolin: Many thanks for the interview and your time, Mr Hachmeister.

[1]  The author conducted this interview as part of the DLT Talents programme at the Frankfurt School Blockchain Center (https://my.dlt-talents.com/).