Blockchain will secure global derivatives trading

Rage Review : The Depository Trust and Clearing Corporation (DTCC), one of the major providers of financial market infrastructure, will use blockchain technology to "rebuild" its existing transaction information warehouse starting next year, automatically save and manage about 98% of the world's credit derivatives transaction records and payments, and help settle post-trade transactions of credit derivatives. This is the first application of this technology in strengthening the global financial system.

Translation: Flora

One of the main providers of financial market infrastructure will start using blockchain technology, the cryptographic software underlying bitcoin and other digital currencies, to help settle post-trade transactions in credit derivatives next year, the first application of the technology to strengthen the global financial system.

The Depository Trust and Clearing Corporation (DTCC) said in a press release this week that it will "rebuild" its existing trade information warehouse to automatically store and manage records and payments for about 98% of the world's credit derivatives transactions, amounting to $11 trillion per year.

Credit derivatives are financial instruments that allow lenders to effectively sell loans without worrying about repayment, reducing their exposure. A key cause of the 2008 financial crisis was the creation of a large number of "dark" risks while evading regulators.

According to the press release, the depository and clearing house plans to incorporate blockchain into the backend of its trade information warehouse while preserving “existing functionality and interfaces with technology providers and market participants.”

The agency said it had chosen IBM, Axoni and R3 to provide its blockchain.

The statement went on to say that the new technology “will enable depository and clearing institutions and their clients to further simplify and automate, and reduce derivatives processing costs across the industry by eliminating disjointed, redundant processing functions and associated reconciliation costs.”

Blockchain, also known as distributed ledger technology, uses cryptography and distributed computer networks to create a real-time, secure, and unforgeable record of transactions. Blockchains can be public, like Bitcoin, where anyone can download the software and become part of the distributed ledger. But the depository and clearing house plans to build a "permissioned" blockchain, a private chain that can only be accessed by invited participants.

The statement said that the blockchain technology will be used in phases later this year and will be launched in early 2018. The software protocol used "will be submitted to Hyperledger when the solution is put into practice." Hyperledger is an open source blockchain collaboration project launched by the Linux Foundation. Members will fully review the software submitted by the depository and settlement agency.

According to the agreement, the statement continued:

“IBM will take the lead, providing program management, (blockchain) technical expertise and integration services, and delivering the solution as a service. Axoni will provide the distributed ledger infrastructure (based on its AxCore distributed ledger protocol) and smart contract applications. R3 will serve as a consultant to the solution.”

The depository and clearing house has been one of Wall Street’s most vocal backers of blockchain, and over the past two years, the firm has conducted a series of experiments, pilots and evaluations, but no actual implementation.

Last year, the Depository and Clearing Corporation announced that it had successfully tested the use of a distributed ledger database to settle credit default swaps. This week, the agency said the pilot “demonstrated that the complex post-trade events inherent in credit default swaps (CDS) can be effectively managed using distributed ledger technology in a permissioned, distributed, peer-to-peer network.”

Chris Childs, CEO of the DTCC’s derivatives and services division, said the move would allow them to “minimize costs for the industry and increase our speed to market.”