Blockchain test on credit default swaps deemed a success

Blockchain test on credit default swaps deemed a success

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A blockchain test handling the post-trade elements of US credit default swaps has been hailed as a success by the major banks and tech firms involved.

Seven firms, including clearing and settlement giant DTCC, used the distributed ledger technology over the course of several months.

Payments, amendments, novations and compressions were all handled by the new system.

Credit default swaps, which act as insurance against bad loans, were selected for the test due to their tendency to throw up “complex” post-trade events.

They were one of a number of derivative instruments that contributed to financial crisis that struck in 2007-2008.

Participants in the test, including Citi, Credit Suisse and J.P. Morgan, said the project also demonstrated that transparency could be made available to regulators in real time.

Individual trade details, counterparty risk metrics and systemic exposure to each reference entity were all captured.

Blockchain has been tipped by many to be the technology that revolutionises highly manual, complex processes across global financial markets. 

It started with some key perceptions around virtual currency bitcoin, which is underpinned by blockchain. 

One was that bitcoin transactions settle within minutes so there is minimal settlement latency. Secondly, payers and receivers of bitcoin use a distributed ledger - meaning no central data store.

"This test reinforces that collaboration among service providers will be critical to ensuring blockchain is harnessed, assessed and implemented consistently," said Chris Childs, chief executive of DTCC Deriv/SERV.

Brad Levy, managing director and head of Markit’s processing division, said the collaboration in CDS illustrates how 'smart contracts' can facilitate "higher levels of automation in over-the-counter (OTC) markets".

Markit generated contracts from CDS trade confirmations sourced from MarkitSERV, creating a distributed record on the network, which was powered by Axoni software.

“Our experiments with Axoni demonstrate that confidentially and privacy can be preserved between bilateral parties on an immutable distributed ledger at scale," added Emmanuel Aidoo, who leads blockchain and distributed ledger function at Credit Suisse.

DTCC is also working on plans to develop and test a blockchain technology tool managing the clearing and settlement of repo transactions.

Last month it unveiled plans to team up with blockchain specialist Digital Asset Holdings, a company backed by Goldman Sachs and run by former J.P. Morgan executive Blythe Masters.

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