ECB targets collateral in tokenised markets push

Speaking on Wednesday, ECB executive board member Piero Cipollone said the central bank is targeting collateral management as part of its push to build an integrated European tokenised financial market, as distributed ledger technology expands across derivatives, settlement and post-trade workflows.

"With Appia, we are building a road from today's financial system to tomorrow's tokenised markets, firmly grounded in central bank money," Piero Cipollone, member of the ECB's executive board, said in a speech.

The ECB has identified collateral management as one of the building blocks being considered under Appia, alongside technical standards, interoperability, cross-border connectivity and legal and regulatory frameworks.

Pontes, which is due to become available from September, will provide the first stage of the strategy by connecting DLT platforms with the Eurosystem's existing TARGET Services.

"From September, we will offer tokenised central bank money settlement for DLT-based transactions as part of our Pontes project. This will provide a safe asset and a trusted common anchor that tokenised markets can use to grow at the speed and scale Europe needs," Cipollone said.

Appia represents the longer-term initiative, with the ECB targeting a blueprint for an integrated European tokenised financial ecosystem by 2028.

The plans build on the central bank's wider push to establish central bank money as the settlement asset underpinning European tokenised markets.

In May, ECB president Christine Lagarde warned that growing use of stablecoins in tokenised markets could create risks for derivatives, repo and settlement infrastructure, while highlighting increasing use of tokenised money market funds as derivatives collateral.

Lagarde said at the time that tokenised money market funds "deployable as collateral in derivatives and repo markets" roughly doubled in market capitalisation during 2025 to around €7 billion (£6 billion).

"Activities that once required manual coordination, such as coupon payments, margin calls and collateral movements, can instead be executed automatically through code," she said.

ECB targets collateral mobility

Cipollone has also identified the ability to mobilise tokenised assets as collateral as important to the development of digital financial markets.

"Tokenised assets need to be eligible as collateral that can be mobilised in monetary policy operations. This will improve the liquidity of DLT-based assets, which is critical to making digital finance more scalable and attractive," he said in May.

Since the end of March, the Eurosystem has accepted marketable assets issued through central securities depositories using DLT as collateral for Eurosystem credit operations.

The ECB is also exploring whether eligibility could eventually be extended to DLT assets that are not represented in eligible securities settlement systems.

Cipollone said central bank money would remain important as a risk-free settlement asset as more financial activity moves onto tokenised infrastructure.

"Without tokenised central bank money as a settlement asset, every transaction in the new ecosystem would need to be settled using an instrument that carries credit risk and does not provide the finality that only central bank money can," he said. "Without a trusted public settlement anchor, sellers of a tokenised security may receive payment in an asset they are not comfortable holding."

ISDA highlights non-cash margin shift

The ECB's push comes as derivatives firms seek to broaden the assets available to meet collateral requirements.

The International Swaps and Derivatives Association (ISDA) on Wednesday highlighted growing momentum behind the use of non-cash assets as variation margin for bilateral derivatives, driven by firms seeking to keep cash invested, reduce reliance on repo markets and maintain a more diverse pool of pledgeable assets.

The trade body identified tokenisation, triparty arrangements, money market funds and US Treasury exchange-traded funds as potential ways of facilitating greater use of non-cash variation margin.

"Expanding eligible VM collateral is a 'journey of inevitability'. The direction of travel is clear: cash is no longer free, firms are unwilling to hold it at the expense of investment returns, and the events of recent years have underscored the value of a diverse and readily pledgeable pool of assets. The challenge is not whether to expand eligible collateral but how to do it in a way that is operationally sound and does not introduce new risk," ISDA said at the time.

ISDA said significant operational challenges remain around eligibility definitions, collateral selection, substitutions, asset servicing and concentration limits, with many processes still manual and varying between firms.

The association called for standardised collateral definitions, automated workflows and integrated systems connecting trading, custody and settlement.

The push comes as derivatives market infrastructure providers seek to give participants greater flexibility over the assets they can use as collateral. LCH last month began accepting offshore renminbi-denominated Chinese government bonds as eligible non-cash collateral, allowing clearing members to use a broader pool of assets to meet margin requirements.