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Leading Banks, DTCC, Markit Successfully Complete Blockchain Test For Credit Default Swaps
Seven firms, which includes 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, have announced 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).
“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”, said Chris Childs, CEO, DTCC Deriv/SERV. “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”.
The reason for selecting CDS transactions for this initial test case lies in the various lifecycle events which apply to them, 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.
“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 announcement read.
The project ran for a couple of months and involved establishing a blockchain trade processing network across a blend of hosted and locally-installed deployments of Axoni software.
Markit generated smart contracts from CDS trade confirmations sourced from MarkitSERV, creating a synchronized, distributed golden record on the network. These smart contracts incorporated economic terms along with computational logic to manage permissions and event processing.
“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”, said Brad Levy, managing director and head of Markit’s Processing division.
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.
Last month, 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.