The Depository Trust & Clearing Corporation (DTCC), the major post-trade infrastructure hub, has selected IBM, Axoni and R3 to re-platform its Trade Information Warehouse, which currently manages post-trade processing for nearly all credit derivatives. The new post-trade blockchain system is planning to go live in early 2018.
The firms will work collaboratively to build a derivatives distributed ledger solution for post-trade processing based on DTCC's existing Trade Information Warehouse (TIW) capabilities. The TIW service currently automates the record keeping, lifecycle events, and payment management for more than $11 trillion of cleared and bilateral credit derivatives, as well as publishing public reports on open positions, providing week-on-week activity change and market risk activity for a vast majority of CDS contracts.
So, if the TIW as a centralised entity currently provides all these services, why do you need a blockchain?
The existing TIW, which is member-owned utility, has a high fixed cost. A distributed ledger model will have significantly lower costs in terms of implementation and management.
More importantly, this is a first step towards an end goal state that's extremely attractive for the industry.
Greg Schvey, CEO of Axoni, said: "Right now the gold record, meaning the legally verifiable record of a trade, lives at the TIW – full stop. The goal will be where end users, counterparties, can actually take in-house that gold record of the trades.
"In subsequent phases of this, participants will be able to synchronise against that gold record which is byte for byte the same exact data, the same exact state of a contract, internally at their firm and have the ability to use that within any area of the firm that requires it. So there are huge synchronisation benefits here.
"I think a lot of people are looking at this as a first step towards many other assets they would like to go on blockchains. The fact that credit derivatives are relatively standardised is what initially enabled them to be centralised.
"Using that as a starting point where you both have a cost savings but also a very clear target as to what the functionality is supposed to be, allows you to have a very clear concise first step.
"You can then lay the ground work for many other assets to be on such a network once this first step is taken."
The solution has been developed with input and guidance from a number of market participants including Barclays, Citi, Credit Suisse, Deutsche Bank, J.P. Morgan, UBS and Wells Fargo, and key market infrastructure providers, IHS Markit and Intercontinental Exchange, said a statement.
The endstate vision is to establish a permissioned distributed ledger network for derivatives, governed by industry-owned DTCC, with peer nodes at participating firms, it said. Under the agreement, IBM will lead the initiative, provide programme management, DLT expertise, and integration services, and offer the solution-as-a-service. Axoni will provide distributed ledger infrastructure and smart contract applications, with R3 acting as a solution advisor.
Development is expected to begin in January 2017 and build on Axoni's AxCore distributed ledger protocol which will be submitted to Hyperledger when the solution goes live, anticipated in early 2018. Axoni was also involved in the successful completion of a proof-of-concept (POC) for North American single name Credit Default Swaps (CDS) last year with DTCC, IHS Markit and several market participants, and more recently a smart contract POC for equity swaps which involved Barclays and Thomson Reuters.
Chris Childs, CEO of DTCC Deriv/SERV said: "IBM, Axoni and R3 offer valued DLT expertise as well as a strong commitment to the Hyperledger open-source platform and industry standards. We are pleased that they have chosen to leverage their collective expertise and collaborate with us on this initiative, which will allow us to build the best solution for the marketplace while minimizing cost to the industry and expediting our speed to market."
Bridget Van Kralingen, senior vice president, IBM Industry Platforms, said: "As one of the largest and most groundbreaking distributed ledger projects to date in the financial services industry, DTCC together with its member banks are reimagining the credit derivatives process. The combined expertise of IBM and our partners enables us to provide DTCC with a resilient, open and innovative new technology platform to support this groundbreaking opportunity."
David Rutter, CEO of R3, stated: "We're very excited to be working with this team, as DTCC seeks to enhance its derivatives processing technology. Distributed ledger technology is a natural fit for derivatives processing. By recording and automatically managing shared records of financial agreements in the cloud without error, it can minimize the steps required for post-trade processing and free up middle and back office staff from the onerous task of reconciliation."