April 7, 2016 (New York / London) – Seven firms announced today the successful test of blockchain technology and smart contracts to manage post-trade lifecycle events for standard North American single name credit default swaps (CDS). The first of its kind initiative demonstrated that the complex events inherent to CDS, including payments, amendments, novations and compressions, can be efficiently managed on a blockchain in a permissioned, distributed, peer-to-peer network.
The group included four global financial institutions (Bank of America Merrill Lynch, Citi, Credit Suisse, J.P. Morgan), The Depository Trust & Clearing Corporation (DTCC) and Markit, in collaboration with Axoni, a distributed ledger technology firm. Over the course of the multi-month project, the group established a blockchain trade processing network across a blend of hosted and locally-installed deployments of Axoni software. CDS transactions were selected as the basis for this initial test case due to the variety of lifecycle events which apply, as well as the availability of an efficiency benchmark established by the DTCC Trade Information Warehouse (TIW), the global market standard for post-trade asset servicing of credit derivatives.
In the test, Markit generated smart contracts from CDS trade confirmations sourced from MarkitSERV, creating a synchronized, distributed golden record on the network. Embedded in those smart contracts were economic terms, as well as computational logic to manage permissions and event processing. The project also demonstrated the transparency which could be made available to regulators in real time, including individual trade details, counterparty risk metrics and systemic exposure to each reference entity.
In early March, the participants conducted a diverse set of 85 structured test cases to assess lifecycle functionality, integration with external systems, network resiliency, and data privacy. The Axoni implementation achieved a 100% success rate across all tests.
Chris Childs, CEO, DTCC Deriv/SERV, said, “Blockchain and distributed ledger technology has the potential to revolutionize highly manual, complex processes across global financial markets.
This test reinforces that collaboration among service providers will be critical to ensuring the technology is harnessed, assessed and implemented consistently. We look forward to future collaboration with the industry on innovative ways to leverage this technology to reduce costs and increase efficiencies in the post-trade process.”
Brad Levy, managing director and head of Markit’s Processing division, said: “This collaboration in CDS illustrates how smart contracts can facilitate higher levels of automation in OTC markets. The success of this initiative reinforces our commitment to continued development of blockchain technology in CDS, other asset classes and financial industry processes more generally.”
“Our experiments with Axoni demonstrate that confidentiality and privacy can be preserved between bilateral parties on an immutable distributed ledger at scale,” said Emmanuel Aidoo who leads Blockchain and Distributed Ledger Function at Credit Suisse.
“It’s a pleasure to be part of such a tremendous step forward,” stated Axoni CEO Greg Schvey, “The participants in this project can catalyze true progress in this space, having consistently demonstrated the motivation and technical sophistication necessary to tackle the speed, scale, and complexity of this undertaking.”