LONDON (Reuters) - Payments firm Fnality and fintech HQLAX said on Tuesday they would launch a new service by year end for banks to slash the time and financial resources needed for settling sterling-denominated repo trades.

Fnality said it has applied to its regulator, the Bank of England, for authorisation to introduce intraday settlement of sterling repo, or repurchase agreement transactions.

Settlement of financial transactions currently takes up to two business days, tying up liquidity, though Britain is expected to mirror Wall Street's move last month to shift to one business day.

Repo markets are pivotal in greasing the wheels of financial markets, amongst other things by offering short-term funding for companies, and settlement marks the final leg of a trade when ownership is exchanged for cash.

The new service builds on Fnality's sterling payment system becoming the world's first regulated blockchain-based wholesale payment system last December to settle transactions that digitally represent funds held at a central banks.

"Fnality and HQLAX are now preparing to officially launch wholesale cross-chain repo settlements in live environments later this year, subject to regulatory approvals," the two companies said in a joint statement.

Fnality and HQLAX have already completed end-to-end testing of intraday settlement of a repo trade submitted to Deutsche Boerse's Eurex trading system, with collateral recorded by HQLAX, and cash handled by Fnality's payment system.

It is the latest sign of firms seeking to use distributed ledger technology (DLT) or blockchain, the technology that underpins cryptoassets, to speed up back-office operations to cut risk and the length of time costly liquidity is tied up.

Fnality said the new service would give banks greater control over transactions by opening the possibility of executing a repo trade first thing in the morning and having it settled within hours.

Lloyds, UBS and Santander banks have indicated interest in using the new service, Fnality said.

(Reporting by Huw Jones; Editing by Jan Harvey)

By Huw Jones