Tokenised money market funds have started clearing the collateral test at the margin desk

For three years the tokenised fund business had a product and no use case. Issuers wrapped shares in a government money market fund, put the register on a shared ledger, and told anyone who would listen that settlement now took seconds. Buyers agreed that this was true and asked what they were supposed to do with it. Redeeming a money market fund at four in the afternoon is not a problem anybody had. The answer arrived from an unglamorous direction, which is the collateral schedule at a derivatives clearing house.

Growth of that shape usually means one of two things: a single very large allocator, or a structural change in what the instrument can be used for. This one is the second. Ravensworth attributes roughly 58% of the increase in the last three quarters to balances held by derivatives clearing members and their clients, which is a category that did not exist in the data two years ago.

The reason this took years rather than months is that a clearing house asks harder questions than a treasurer does. A collateral schedule has to specify what happens when a member defaults at eleven at night, who has the legal power to move the asset, whether the transfer is final or reversible, and what the asset is worth in a market where the issuer's redemption window has closed. For a Treasury bill held at a central depository, every one of those answers is a hundred years old. For a fund share recorded on a ledger, all of them had to be written from scratch.

What the three venues actually agreed

The terms published so far are conservative in a way that suggests the risk committees rather than the business development teams wrote them. Haircuts are wider than the underlying credit justifies, concentration caps are tight, and eligibility is limited to funds holding only government paper with a stated weighted average maturity inside sixty days.

A member posting a tokenised fund share therefore accepts a worse haircut than posting the bills directly and gains the ability to move the collateral at three in the morning on a Sunday. Whether that is a good trade depends entirely on how often the member gets called outside banking hours, which is a question with a very different answer for a firm clearing crypto derivatives than for one clearing interest rate swaps.

We modelled it as an insurance premium rather than a funding decision. The haircut costs us a fixed amount every day. The intraday credit line we no longer draw on costs us a great deal on about nine days a year, and those nine days are the ones where the line might not have been there.

Adaeze Okpara, head of transaction banking at Northgate Bancorp

Where this competes and where it does not

Comparisons with stablecoins are natural and mostly wrong. A tokenised fund share pays the underlying yield to its holder and is a regulated fund interest with a daily net asset value, a transfer agent and a prospectus. A fiat backed stablecoin is a bearer claim that pays its holder nothing and remits the reserve income to the issuer. They settle the same way and they are different products for different jobs.

That limitation is the honest measure of how far this has come. The collateral is mobile and the cash behind it is not, which means the product solves the second half of a problem and leaves the first half to a committed liquidity facility that somebody has to underwrite. Two of the three venues have said they are working on exactly that, which will be the next thing worth watching.

The broader significance is smaller than the issuers claim and larger than the sceptics allow. Nobody has reinvented money market funds. What has happened is that a settlement mechanism built for speculative assets has been accepted, under conservative terms and with the risk committee's fingerprints all over the document, into the plumbing of regulated derivatives markets. That acceptance is the precedent. The balances will follow it.