Europe's bailout fund settles a €1bn digital bond in central bank money

The European Stability Mechanism, the euro area's lender to governments in financial trouble, has settled a €1bn bond issued on a shared digital ledger. The bond was paid for on Monday 2 November in central bank money, the risk-free money banks hold at the central bank. It moved through Pontes, a service the euro area's central banks opened on 21 September to link private ledgers to their own payment systems. Piero Cipollone, a member of the European Central Bank's executive board, confirmed the settlement in a speech on 5 November.

On the same day, Eurex Clearing, part of the German exchange group Deutsche Börse, said traders would be able to borrow against such bonds. A clearing house stands between the two sides of a trade and guarantees it if one side fails. Eurex said digital bonds, including the fund's, will become tradable in its market for repos, short-term loans secured against bonds. They will also count as margin, the collateral traders post to cover possible losses. Eurex calls itself the world's first "hybrid" clearing house. "The future of financial markets is hybrid," said Laura Bayley, its chief executive. "Instead of creating isolated digital islands that fragment liquidity and trap capital, Eurex Clearing is building a bridge between both ecosystems."

What matters is whether anyone will trade such bonds once they are sold. Some earlier bonds issued on ledgers have traded rarely afterwards, Ledger Insights, a trade publication, notes. A clearing house only accepts collateral it could sell quickly if a borrower defaulted. Eurex says the digital bonds will suffer no disadvantage against their conventional equivalents. If that holds, a bond born on a ledger becomes as useful for borrowing as an ordinary one.

The bond is digital only at birth, according to Ledger Insights, which cites the fund's own diagram. Clearstream, Deutsche Börse's securities depository, creates the token on its ledger and settles the sale against central bank money. The bond then moves to Clearstream's conventional settlement system, where trading, transfers and interest payments work as usual. A listing on the Luxembourg Stock Exchange is expected. Ledger Insights says the bond qualifies as collateral because the euro area's central banks decided last March to accept digital securities issued through a depository.

Much is not settled. Eurex gave no date for when the bonds can be used. Its release and both trade reports describe what will happen rather than what already has, and A-Team Insight, another trade outlet, calls it a proposed model. Pontes will gain longer hours gradually and run round the clock in 2028, Mr Cipollone said. Other issuers, including the World Bank, are preparing to issue on ledgers and might settle through Pontes, he added. Coverage so far comes from trade publications.