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HSBC plans for digitized capital markets

Underwriting Olam’s bond via blockchain is just the start of a massive shift to tokenization.

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Rajeev Tumulla, HSBC

Rajeev Tummala, HSBC’s head of data and digital at its markets and securities services arm, is preparing business strategies for the bank to take advantage of the coming wave of tokenizing assets.

“We need a portfolio of options,” the Singapore-based director told DigFin. That means working on projects such as the bank’s recent underwriting of Singapore’s first bond issued over blockchain technology, for local listco Olam International.

He sees banks like HSBC serving as a link between the innovations taking place in the crypto world and the kind of digital asset services that bank customers and investors can use. “Traditional financial institutions can be a bridge,” he said.

The Olam bond was an all-institutional deal, co-arranged with Temasek (the holding company for Singapore Inc.) and distributed to private banks and other investors, via a platform operated by Singapore Exchange. (See below for details.)

Tokenization tally

Rajeev – as he prefers to be called, even in print – says the real potential of digital assets, however, is to open up financial services to a vast retail customer base.

A bank’s “bridge” could be how to originate and distribute tokenized equities and bonds.

“The world of public blockchain has the capability of creating smart assets,” based on smart contracts, he said. “Tokenization is defined by the software, so once you have smart assets, they can interface with other software components.”

We need a portfolio of options

Rajeev Tummula, HSBC

In practical terms, that suggests fractionalizing assets – using technology to offer people slivers of a bond or a stock, which normally trades in sizes too large for individuals to handle – can open up vast stores of wealth.

According to a recent report penned by Rajeev and his team, the global securities market is $178 trillion, as of end 2019. Of that wealth, 43.9% is held by only 0.9% (it’s not even quite the one percent!). More than half the world’s population holds only 1.8% of wealth.

“This group would benefit from affordable access to a wider range of investable assets,” the report says, with tokenization making it easier to offer wealth products to the underbanked.

The tokenized markets could stand at $24 trillion by 2027, HSBC adds, citing predictions by World Economic Forum.

Banking’s future?

For that vision to come about depends on many factors, but banks can help galvanize trends in this direction, Rajeev says. They would benefit by first vastly increasing new client segments, second by creating huge new trading volumes of digital assets, and third by using distributed-ledger technology to become far more efficient, lean organizations.

Today assets are already dematerialized but they still exist as entries on multiple internal databases, which need constant reconciliation. Representations as tokens defined by smart contracts via DLT cuts out all of that cost. Moreover, fractionalizing a token means the same effort that goes into processing a $10 million trade can go to managing a $100 trade.

This is why both crypto players and banks are creating networks defined by software, separate from existing market infrastructure. This will create new regulatory and security issues, but real-time data will also provide new benefits to supervisors.

For banks like HSBC, with a huge business in securities services and corporate-banking services, this is going to mean a very different business profile.

Rajeev puts it like this: “A universal bank has data points from across the economy, which means we have more insights, if we harness our data capabilities.” In other words banks would become repositories of data, rather than custodians of securities, competing with other networks (such as Big Tech ecosystems).

“The challenge is putting the data together so it makes sense, and having the governance capability because this data belongs to our clients,” Rajeev said.

But that means a lot of functions banks now perform, particularly in securities services, will be redundant if they remain focused just on processing.

“I think the traditional job of a bank will become more important,” Rajeev said. “We will focus on giving investors access to wider opportunities and to counterparties, while the flows in the back will move seamlessly. Balance sheet, geographic footprint, and distribution will matter.”

Fintech challenge

Reaching this point will require a lot of trial and error, and fast iteration – an area where fintechs have an advantage. HSBC is working on projects like the Olam bond deal to learn: that experience involved the bank’s cash management and debt capital markets teams, as well as securities services.

The experience is meant to clarify choices the bank will have to make, rather than force a particular decision. It’s also to keep pace with fast-paced innovators.

The traditional job of a bank will become more important

Rajeev Tummula, HSBC

Rajeev recognizes the experimentation taking place in the crypto space, but also believes a lot of the cutting edge today, like in the decentralized-finance world, is heading further away from what mainstream, regulated finance will accept.

“Fintechs are keeping us on our toes,” Rajeev said, “but we are collaborating with the likes of SGX and Temasek to improve the market infrastructure.”

The Olam deal

The Olam deal was announced on September 1. According to the announcement by SGX, it completed its first digital bond issuance on SGX’s digital asset issuance, depository and servicing platform, successfully replicating a S$400 million 5.5-year public bond issue and a follow-on S$100 million tap of the same issue by Olam International.

“An Asia first for a syndicated public corporate bond, this digital bond marks another milestone in SGX’s use of digital asset technology, by streamlining processes for issuers, underwriters, investors and ecosystem participants across primary issuance and asset servicing.

“SGX utilized DAML, the smart contract language created by Digital Asset, to model the bond and its distributed workflows for issuance and asset servicing over the bond’s lifecycle. SGX’s solution uses smart contracts to capture the rights and obligations of parties involved in issuance and asset servicing, such as arrangers, depository agents, legal counsel and custodians. 

“The digital bond used HSBC’s on-chain payments solution which allows for seamless settlement in multiple currencies to facilitate transfer of proceeds between the issuer, arranger and investor custodian.

“Key efficiencies observed within the pilot include timely ISIN (identifier) generation, elimination of settlement risk (for issuer, arranger and investors), reduction in primary issuance settlement (from five days to two days) as well as automation of coupon and redemption payments and registrar functionality. 

“Building on this digital issuance, SGX will work with issuers, arrangers, custodian banks and investors to digitalize bond issuance, depository and asset servicing, progressively growing the fixed income ecosystem.”


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