DIGIT: A new era for repo and collateral?
15 April 2025
As the UK government moves forward with the Digital Gilt Instrument, Daniel Tison examines how it could reshape repo and collateral management
Image: stock.adobe.com/viking75
As an entirely new, digitally native, UK government debt asset, the Digital Gilt Instrument (DIGIT) will be a transferable security held on a distributed ledger technology (DLT) platform. Issued separately from standard government debt, it will initially be short-dated, marking a significant departure from traditional gilts. However, this vision remains in its early stages, as key questions around its implementation and impact are yet to be answered.
Utilising DLT, the DIGIT pilot aims to explore the potential benefits and challenges of digital securities within the UK capital markets. While the primary objective of the instrument is to enhance efficiency in the gilt market, its impact on securities finance — particularly repo and collateral management — could be substantial.
Glenn Handley, management consultant at SecFin Solutions, says: “The UK’s new digital gilt initiative is more than just an experiment. It’s a step toward fully digital capital markets. And it’s set to transform repo and securities financing.”
Green light for DLT
On 18 March, Chancellor Rachel Reeves confirmed the UK government’s plans to advance the DIGIT pilot, following the initial announcement in November 2024.
“The UK is leading the way on digital innovation, and the creation of DIGIT will help to transform our world-leading capital markets sector and drive economic growth,” said Reeves.
In a policy paper published on the same day, HM Treasury (HMT) acknowledges that DLT has the potential to transform financial markets, settlement, and trading, with a number of listed benefits.
This includes increased efficiency by making transactions faster, reducing the need for manual processes, and facilitating programmable assets. Providing a single, accessible record of transactions also enhances transparency. Furthermore, the paper highlights that reducing single points of failure leads to improved resilience across financial markets.
“DLT use cases are being explored with increasing ambition by financial centres across the globe and there is potential for significant growth in this area in the coming years,” says HMT.
Matteo Sbraga, a partner at Clifford Chance who works within the firm's debt capital markets practice, has seen a sharp increase in the use of DLT for digital bond products over the past two to three years.
“There’s quite a demand for DLT at the moment, although DLT-issued digital bonds still make up a very small proportion of the overall bond markets,” he clarifies. “We are still in the exploratory phase, but the idea is that, hopefully, the DIGIT project will help to kick-start the DLT bond market in the UK in a more widespread fashion.”
His colleague Diego Ballon Ossio, who spearheads Clifford Chance’s fintech offering, agrees that DLT is becoming increasingly more prevalent, with companies developing their own platforms and some starting joint projects.
On the other hand, Handley argues that DLT has been around for some time, and its implementation by financial institutions has been slow.
“There is demand, but banks and other institutions have had quite a lot on their plate recently, so it’s probably not been right at the top of the list,” he states.
On that note, Sbraga adds: “Market participants generally accept that there should be some form of modernisation in the way that bonds are issued — the question is, how to achieve that modernisation? DLT is one way to streamline and make the bond issuance process more efficient, but there are also other ways to do it.”
HMT and the UK Debt Management Office (DMO) completed their market engagement process on 13 April, gathering insights from technology providers and investors regarding the issuance, settlement, and trading of digital gilts.
The procurement phase is expected to progress in late spring 2025, with further developments anticipated through the Digital Securities Sandbox (DSS), which opened in the autumn of last year to provide a regulatory environment for testing DLT applications in financial markets.
It is expected that DIGIT will be issued on a platform within the DSS, and suppliers will need to obtain any necessary permissions from the Bank of England and the Financial Conduct Authority (FCA) to operate in the sandbox before they will be eligible for selection under the associated procurement.
Following the publication of a tender notice, the successful supplier will be selected in late summer. HMT and the DMO are open to considering solutions involving multiple suppliers working together to provide different elements of the service.
New technology, new opportunities
The government’s current inclination towards DLT builds on UK Finance’s digital gilt roadmap from April 2024, which provided a blueprint on how the UK could lead with a successful digital gilt issuance. Through its industry discussions, the trade association narrowed down the key benefits of issuing DIGIT.
“The combination of automated processes, a reduced need to pre-position collateral, and enhanced settlement could help investors manage gilt collateral more efficiently to meet margin calls in times of stress,” says UK Finance.
Tokenised securities can be issued directly to the end-investor, which lowers costs by reducing the number of intermediaries involved. This shortens the traditional clearing and settlement cycles, reducing counterparty and systemic risk, and freeing up capital. Shorter settlement cycles may also reduce the amount of capital locked up in transactions, allowing for more dynamic allocation of assets.
Additionally, 24/7 trading facilities and the ability to use a digital gilt as high-quality collateral can improve liquidity by providing access to liquid assets for institutions. Digital gilts could allow for real-time collateral transfers, minimising the need for pre-positioning and unlocking additional funding sources.
UK Finance adds: “The above points represent clear benefits to embarking on the journey to launch the first ever UK digital gilt. Additionally, trust will be built among UK and international investors by showcasing momentum to transform the UK capital markets into digital-first markets, prioritising cheaper and easier ways of transacting.”
Similarly, Handley recognises the significance of such benefits as market efficiency and cost reduction from this journey.
He says: “There are trillions of securities that settle every day, and there's no need for them to settle every day if you can find a smart way around it, so I do think it will be adopted within five years or so.”
For Sbraga, the successful implementation of DLT for sovereign bonds would also give confidence to the market, which is necessary when any new technology is being introduced.
Regulatory and market structure challenges
Despite potential benefits, questions remain regarding the integration of DIGIT into existing collateral frameworks. Compatibility with CCP clearing structures, along with regulatory compliance with existing capital and liquidity requirements, appear to be key factors influencing adoption.
Sbraga says: “One of the key barriers at the moment to widespread adoption of DLT-based digital bonds is the lack of a generally accepted on-chain solution for settlement of the cash leg of a transaction, and that will affect use cases in the primary and secondary markets.”
While the DSS provides a controlled environment for experimentation, broader regulatory considerations could affect the rollout of DIGIT. Market participants will need clarity on how DIGIT interacts with existing frameworks, such as the Securities Financing Transactions Regulation (SFTR) and the Central Securities Depositories Regulation (CSDR).
“There are pieces of legislation in place which make it a little more difficult to issue a digital gilt outside the DSS,” Sbraga acknowledges, "and given that we’ve now got this brand new sandbox regime in place in the UK, it makes a lot of sense for the DIGIT project to go through that regime.”
Going forward, he hopes that the UK government will introduce a regime that could be used on a more permanent basis.
Additionally, the potential coexistence of traditional and digital gilt markets raises concerns about liquidity fragmentation and pricing disparities.
Ballon Ossio points out: “The question is, can it then be used in the same way as other instruments? And this is where the sandbox is falling slightly short because that will depend on what the sandbox allows people to do, so then it’s up to the participants and the regulators to agree on where the boundaries lie.”
He is excited about the DSS project, but acknowledges its boundaries, which could also represent challenges in DIGIT adoption.
“Everybody we’ve been speaking to — lots of firms — wants to be a part of the project. Everybody is excited about the announcement, and they are keen to participate,” says Ballon Ossio. “But if you think about it, there is no way in which every market participant will be able to participate. And so, one of the challenges will be, how do we actually get everybody to be part of this?”
He explains that the DSS is designed to be a testing environment, which means volumes and quantities are limited.
“For true adoption to happen, you need to move away from this testing environment. You need to really start deploying in the normal course,” Ballon Ossio urges. “Until we clear this testing stage, we won’t be able to do that commercially.”
Catapulted to the spotlight
Despite promising potential, the success of DIGIT will depend on industry adoption and the willingness of market participants to integrate digital gilts into securities finance activities. If the pilot demonstrates operational efficiencies and risk reduction, it could pave the way for further innovation in sovereign debt markets. However, the transition period may present challenges, particularly in terms of technology integration and regulatory harmonisation.
Market participants agree that the successful adoption of digital gilts would be a milestone, moving the UK ahead of its competitors — but a quick and effective implementation is necessary.
“You don’t have the luxury of stretching it out too long,” states Ballon Ossio. “You want to test lots of environments and different ways of doing things, and you don’t want to necessarily enshrine the position of established players if there is new technology and new vendors with new ideas that are developing stuff. You want to foster innovation, but we need speed. We need this to happen quickly, and that’s tricky.”
In the words of UK Finance, “the UK has the opportunity to lead in this space, but it must act now”. In its report, the trade association concludes that the ultimate objective is to have an established digital financial market infrastructure to run a DLT-based platform for the end-to-end trade lifecycle.
Sbraga believes that collaboration across the industry will be key to achieving that, with all different parties on board.
“You can’t just have an issuer who wants to issue a DLT digital bond if you don’t have the investors or the market operators on board,” he explains. “You need all the market participants to come together in order for a transaction to be truly successful and for the DLT digital bond market to scale."
As the UK moves forward with this initiative, engagement between policymakers, financial institutions, and technology providers is crucial in shaping the future landscape of digital securities. The potential impact of DIGIT on securities finance remains an area of active discussion, with further insights expected as the pilot progresses.
Handley anticipates that the successful implementation of digital gilts could serve as a template for further innovation in financial markets. This could mean all asset classes, including corporate bonds.
Ballon Ossio concludes: “There’s no other jurisdiction that has done this, so we would certainly be catapulted to the spotlight.”
Utilising DLT, the DIGIT pilot aims to explore the potential benefits and challenges of digital securities within the UK capital markets. While the primary objective of the instrument is to enhance efficiency in the gilt market, its impact on securities finance — particularly repo and collateral management — could be substantial.
Glenn Handley, management consultant at SecFin Solutions, says: “The UK’s new digital gilt initiative is more than just an experiment. It’s a step toward fully digital capital markets. And it’s set to transform repo and securities financing.”
Green light for DLT
On 18 March, Chancellor Rachel Reeves confirmed the UK government’s plans to advance the DIGIT pilot, following the initial announcement in November 2024.
“The UK is leading the way on digital innovation, and the creation of DIGIT will help to transform our world-leading capital markets sector and drive economic growth,” said Reeves.
In a policy paper published on the same day, HM Treasury (HMT) acknowledges that DLT has the potential to transform financial markets, settlement, and trading, with a number of listed benefits.
This includes increased efficiency by making transactions faster, reducing the need for manual processes, and facilitating programmable assets. Providing a single, accessible record of transactions also enhances transparency. Furthermore, the paper highlights that reducing single points of failure leads to improved resilience across financial markets.
“DLT use cases are being explored with increasing ambition by financial centres across the globe and there is potential for significant growth in this area in the coming years,” says HMT.
Matteo Sbraga, a partner at Clifford Chance who works within the firm's debt capital markets practice, has seen a sharp increase in the use of DLT for digital bond products over the past two to three years.
“There’s quite a demand for DLT at the moment, although DLT-issued digital bonds still make up a very small proportion of the overall bond markets,” he clarifies. “We are still in the exploratory phase, but the idea is that, hopefully, the DIGIT project will help to kick-start the DLT bond market in the UK in a more widespread fashion.”
His colleague Diego Ballon Ossio, who spearheads Clifford Chance’s fintech offering, agrees that DLT is becoming increasingly more prevalent, with companies developing their own platforms and some starting joint projects.
On the other hand, Handley argues that DLT has been around for some time, and its implementation by financial institutions has been slow.
“There is demand, but banks and other institutions have had quite a lot on their plate recently, so it’s probably not been right at the top of the list,” he states.
On that note, Sbraga adds: “Market participants generally accept that there should be some form of modernisation in the way that bonds are issued — the question is, how to achieve that modernisation? DLT is one way to streamline and make the bond issuance process more efficient, but there are also other ways to do it.”
HMT and the UK Debt Management Office (DMO) completed their market engagement process on 13 April, gathering insights from technology providers and investors regarding the issuance, settlement, and trading of digital gilts.
The procurement phase is expected to progress in late spring 2025, with further developments anticipated through the Digital Securities Sandbox (DSS), which opened in the autumn of last year to provide a regulatory environment for testing DLT applications in financial markets.
It is expected that DIGIT will be issued on a platform within the DSS, and suppliers will need to obtain any necessary permissions from the Bank of England and the Financial Conduct Authority (FCA) to operate in the sandbox before they will be eligible for selection under the associated procurement.
Following the publication of a tender notice, the successful supplier will be selected in late summer. HMT and the DMO are open to considering solutions involving multiple suppliers working together to provide different elements of the service.
New technology, new opportunities
The government’s current inclination towards DLT builds on UK Finance’s digital gilt roadmap from April 2024, which provided a blueprint on how the UK could lead with a successful digital gilt issuance. Through its industry discussions, the trade association narrowed down the key benefits of issuing DIGIT.
“The combination of automated processes, a reduced need to pre-position collateral, and enhanced settlement could help investors manage gilt collateral more efficiently to meet margin calls in times of stress,” says UK Finance.
Tokenised securities can be issued directly to the end-investor, which lowers costs by reducing the number of intermediaries involved. This shortens the traditional clearing and settlement cycles, reducing counterparty and systemic risk, and freeing up capital. Shorter settlement cycles may also reduce the amount of capital locked up in transactions, allowing for more dynamic allocation of assets.
Additionally, 24/7 trading facilities and the ability to use a digital gilt as high-quality collateral can improve liquidity by providing access to liquid assets for institutions. Digital gilts could allow for real-time collateral transfers, minimising the need for pre-positioning and unlocking additional funding sources.
UK Finance adds: “The above points represent clear benefits to embarking on the journey to launch the first ever UK digital gilt. Additionally, trust will be built among UK and international investors by showcasing momentum to transform the UK capital markets into digital-first markets, prioritising cheaper and easier ways of transacting.”
Similarly, Handley recognises the significance of such benefits as market efficiency and cost reduction from this journey.
He says: “There are trillions of securities that settle every day, and there's no need for them to settle every day if you can find a smart way around it, so I do think it will be adopted within five years or so.”
For Sbraga, the successful implementation of DLT for sovereign bonds would also give confidence to the market, which is necessary when any new technology is being introduced.
Regulatory and market structure challenges
Despite potential benefits, questions remain regarding the integration of DIGIT into existing collateral frameworks. Compatibility with CCP clearing structures, along with regulatory compliance with existing capital and liquidity requirements, appear to be key factors influencing adoption.
Sbraga says: “One of the key barriers at the moment to widespread adoption of DLT-based digital bonds is the lack of a generally accepted on-chain solution for settlement of the cash leg of a transaction, and that will affect use cases in the primary and secondary markets.”
While the DSS provides a controlled environment for experimentation, broader regulatory considerations could affect the rollout of DIGIT. Market participants will need clarity on how DIGIT interacts with existing frameworks, such as the Securities Financing Transactions Regulation (SFTR) and the Central Securities Depositories Regulation (CSDR).
“There are pieces of legislation in place which make it a little more difficult to issue a digital gilt outside the DSS,” Sbraga acknowledges, "and given that we’ve now got this brand new sandbox regime in place in the UK, it makes a lot of sense for the DIGIT project to go through that regime.”
Going forward, he hopes that the UK government will introduce a regime that could be used on a more permanent basis.
Additionally, the potential coexistence of traditional and digital gilt markets raises concerns about liquidity fragmentation and pricing disparities.
Ballon Ossio points out: “The question is, can it then be used in the same way as other instruments? And this is where the sandbox is falling slightly short because that will depend on what the sandbox allows people to do, so then it’s up to the participants and the regulators to agree on where the boundaries lie.”
He is excited about the DSS project, but acknowledges its boundaries, which could also represent challenges in DIGIT adoption.
“Everybody we’ve been speaking to — lots of firms — wants to be a part of the project. Everybody is excited about the announcement, and they are keen to participate,” says Ballon Ossio. “But if you think about it, there is no way in which every market participant will be able to participate. And so, one of the challenges will be, how do we actually get everybody to be part of this?”
He explains that the DSS is designed to be a testing environment, which means volumes and quantities are limited.
“For true adoption to happen, you need to move away from this testing environment. You need to really start deploying in the normal course,” Ballon Ossio urges. “Until we clear this testing stage, we won’t be able to do that commercially.”
Catapulted to the spotlight
Despite promising potential, the success of DIGIT will depend on industry adoption and the willingness of market participants to integrate digital gilts into securities finance activities. If the pilot demonstrates operational efficiencies and risk reduction, it could pave the way for further innovation in sovereign debt markets. However, the transition period may present challenges, particularly in terms of technology integration and regulatory harmonisation.
Market participants agree that the successful adoption of digital gilts would be a milestone, moving the UK ahead of its competitors — but a quick and effective implementation is necessary.
“You don’t have the luxury of stretching it out too long,” states Ballon Ossio. “You want to test lots of environments and different ways of doing things, and you don’t want to necessarily enshrine the position of established players if there is new technology and new vendors with new ideas that are developing stuff. You want to foster innovation, but we need speed. We need this to happen quickly, and that’s tricky.”
In the words of UK Finance, “the UK has the opportunity to lead in this space, but it must act now”. In its report, the trade association concludes that the ultimate objective is to have an established digital financial market infrastructure to run a DLT-based platform for the end-to-end trade lifecycle.
Sbraga believes that collaboration across the industry will be key to achieving that, with all different parties on board.
“You can’t just have an issuer who wants to issue a DLT digital bond if you don’t have the investors or the market operators on board,” he explains. “You need all the market participants to come together in order for a transaction to be truly successful and for the DLT digital bond market to scale."
As the UK moves forward with this initiative, engagement between policymakers, financial institutions, and technology providers is crucial in shaping the future landscape of digital securities. The potential impact of DIGIT on securities finance remains an area of active discussion, with further insights expected as the pilot progresses.
Handley anticipates that the successful implementation of digital gilts could serve as a template for further innovation in financial markets. This could mean all asset classes, including corporate bonds.
Ballon Ossio concludes: “There’s no other jurisdiction that has done this, so we would certainly be catapulted to the spotlight.”
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