The European Investment Bank announced on 31 January a fully digital bond issue denominated in sterling. The transaction involves a total of £50 million of securities in denominations of £100,000 with a maturity of two years. The EIB has appointed BNP Paribas Securities Services, HSBC and RBC Capital Markets as joint lead managers.
In this architecture, the bonds will be held in digital securities accounts on HSBC’s Orion platform. This platform has two blockchains: a private blockchain that will serve as legal evidence of who holds the securities and a public blockchain to anonymously trace the chain of custody. BNP Paribas Securities Services, RBC Capital Markets and HSBC will act as custodians for investors. All three institutions helped structure the transaction for placement with their clients. While the EIB was advised by Clifford Chance throughout the transaction, the three joint lead managers received legal support from Allen & Overy.
One of the objectives was to reach the UK market.
“The particularity of this instrument is that it is denominated in sterling,” commented Philippe Noeltner, senior associate at Allen & Overy, in an interview. “One of the objectives was to reach the UK market.” But while the commercial aspects are British, the security is governed by Luxembourg law and is listed on a Luxembourg platform, the Luxembourg Stock Exchange Securities Official List.
A favourable legislative framework
, partner at Allen & Overy, described the operation as a “real precedent” in the history of securities issues, in which the country has a role to play. “Luxembourg has two blockchain laws, which create a very favourable framework for such operations. A third blockchain law is still waiting to be passed,” he explained. The two existing laws allow Luxembourg issuers to issue securities directly via a blockchain and to settle them there.
This is the moment for the country to position itself as a blockchain hub, just as it became a fund hub in the 1990s.
The third law will make it possible to take security over the securities registered in the blockchain, which can then be used as collateral for other financing operations, for example. “Luxembourg will be one of the only countries on the planet to have such legislation,” Mausen pointed out. “This is the moment for the country to position itself as a blockchain hub, just as it became a fund hub in the 1990s.” It is an opportunity, but France and Germany also have a blockchain regime and other countries such as the UK and Spain are strongly considering it. The Luxembourg authorities have grasped the issue, according to Mausen. Luxembourg’s financial regulator, the CSSF, “has published a position paper which demonstrates the interest of the authorities in creating a favourable ecosystem.”
Philipe Noeltner, senior associate at Allen & Overy, and Frank Mausen, partner at Allen & Overy, explain the challenges of the emergence of blockchain-based securities platforms. Photo: Romain Gamba
The future will be interoperable or not
Specialising in post-trade activities, Luxembourg has a card to play, observed Noeltner. “It is about the internal plumbing of the capital markets. Blockchain is a technology that can revolutionise this plumbing,” he pointed out, noting that around 40% of the world’s securities are held in the country via Clearstream. “What the players are doing is a bit different today,” he explained. “They are establishing platforms that will compete with Cleastream in other market segments.”
Just as there are bridges between the big legacy platforms such as Euroclear, Cleastream and DTCC, the same thing needs to be achieved with blockchain platforms. They need to start communicating with each other so that securities can be transferred between them.
Nevertheless, the emergence of new platforms based on blockchain technology should not overshadow the importance of interoperability. And this despite the competition issues? “Just as there are bridges between the large historical platforms such as Euroclear, Cleastream and DTCC, the same thing must be achieved with blockchain platforms. They need to start communicating with each other so that securities can be transferred between them,” said Mausen. “You don’t buy a security if your liquidity is reduced, because you can’t sell only on one platform. To attract large investors, securities must be freely transferable between the different systems.” In other words, this is a challenge for the long-term viability and competitiveness of blockchain platforms.
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