Eight firms announced on Tuesday the successful test of blockchain technology and smart contracts to manage affirmations and post-trade lifecycle processing for OTC equity swaps.
The initiative demonstrated the potential efficiency gains and cost savings attainable by processing complex post-trade events inherent to equity swaps – including mark-to-market calculations, margin payments, and corporate action processing – in a permissioned, distributed, peer-to-peer blockchain network.
The group, organized by Axoni, included Barclays (NSYE:BCS), Citi (NYSE:C), Credit Suisse (NYSE:CS), J.P. Morgan (NYSE:JPM), IHS Markit (NASDAQ:INFO), Thomson Reuters (NYSE:TRI), and Capco, a global financial services management consulting firm that is part of FIS (NYSE: FIS).
Over the course of the multi-month project, the group established a blockchain trade processing network using hosted and locally-installed deployments of Axoni Core, Axoni’s proprietary distributed ledger software.
The project tested automated lifecycle management and synchronization of single stock, index, and portfolio swaps, as well as critical components regarding the deployment and management of the distributed ledger network.
For certain types of equity swaps, independently-built swap systems at each major dealer require buy-side firms and their administrators to create complex, bespoke connectivity for each counterparty. The lack of common infrastructure in the market to store and update equity swaps records makes data reconciliation a costly workstream for firms trading these complex and high-volume instruments.
In early September the participants in the proof of concept conducted a diverse set of 133 structured test cases to assess the functional and non-functional capabilities of blockchain technology for use with equity derivatives. Axoni’s software achieved a 100% success rate across all tests.
In the tests, smart contracts were generated from simulated legal confirmations sourced from MarkitSERV or trades submitted by dealers on the distributed network, resulting in a synchronized, golden record of each transaction.
Embedded in those smart contracts were economic terms, as well as computational logic to manage event processing and payment calculations based on market events. Thomson Reuters integrated Thomson Reuters BlockOne for Datascope with specialized software from Axoni to provide valuations, as well as trusted market data including equity prices, LIBOR rates, and corporate actions directly on the blockchain to enable the smart contracts’ automated workflows.
In addition to testing the functionality of the smart contracts, the working group also conducted more than 50 tests of the underlying Axoni Core infrastructure. Examples include adding and removing permissions for participants, the ability to update the protocol in a simulated live environment, capacity to process hundreds of messages per second across the distributed network, and tests to prove Axoni Core’s resiliency to various network events. The project also demonstrated the transparency which could be made available to regulators in real time, from systemic risk analytics to individual trade details, while also preserving data privacy between trading counterparties.
“Complex contracts, a distributed market structure, and replicated workflows across many parties make blockchain technology a natural fit for equity derivatives,” said Axoni CEO, Greg Schvey. “Moreover, demonstrating this can be achieved on the same technology also utilized to optimize post-trade asset servicing for credit derivatives further proves the multiplicative value of deploying this infrastructure,” he added.