Zurich Issues Digital Bond Using Wholesale CBDC

On Monday the Canton of Zurich issued a CHF 100 million ($113m) digital bond via the SIX Digital Exchange, Ledger Insights reported. While most of the bond terms were unexciting – it has an 11 year term and a coupon of 1.45%  – the most distinctive aspect is this transaction is that it settles using a wholesale central bank digital currency (wholesale CBDC) issued by the Swiss National Bank (SNB).

The joint lead managers on the issuance were Zürcher Kantonalbank, UBS and Raiffeisen Switzerland. Zürcher and UBS were announced as part of the CBDC pilot earlier this month, but Raiffeisen was not.

A Zurich spokesperson confirmed that wholesale CBDC settlement takes place on December 1 and only for the two pilot banks. Raiffeisen and the Canton of Zurich will receive conventional Swiss francs, not wholesale CBDC. At that point, the bond will be listed on both the SIX Digital Exchange and the main SIX Swiss Exchange.

• While there have been plenty of wholesale CBDC trials, two things are distinctive about this pilot.
• First, the SNB is allowing the use of a live wholesale CBDC over an extended timeframe.
• Second, the SDX platform on which the SNB issues the CBDC is not a test platform. It is the same production platform that SDX has used for issuing tokenized Swiss francs used for previous SDX settlements.  

Meanwhile, in February the City of Lugano issued a CHF 100 million tokenized bond via SDX with investors able to invest via the SDX central securities depository (CSD) or the conventional SIS CSD. Enabling the use of the SIS CSD means that investors don’t need to be up to speed with DLT and hence significantly improves liquidity. It was the first digital bond to qualify for SNB’s repo.

Zurich confirmed it is similar, subject to the repo approval by the central bank, but it expects to qualify as HQLA Level 1. Additionally, it expects an S&P issuance rating of AAA.

How does settlement work given there are two CSDs?

One point of curiosity is how it’s possible to support settlement on both SIS (T+2 settlement) and SDX (T0) given the different settlement timeframes. The two CSDs are integrated, but because the bonds are natively digital, the SDX CSD is the primary registry.

Exchange trades executed on one exchange cannot settle on the other. Any trade executed on the SIX Digital Exchange settles atomically via the SDX CSD. On-exchange trades executed via the main SIX stock exchange settle in two days via the SIS CSD using x-clear, SIX’s pan-European central counterparty. One can assume that at the two day point, SDX’s blockchain logs the change in real time. Over the counter trades can settle on either CSD.