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$11 Trillion Bet: DTCC to Process Derivatives With Blockchain Tech

(@DelRayMan) | Published on January 9, 2017 at 12:59 BST
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DTCC booth, Sibos

The Depository Trust & Clearing Corporation (DTCC) has selected a series of firms to help integrate distributed ledger technology into its first large-scale, real-world application.

In the single, complex deal involving a distributed ledger consortium, a stock exchange, a tech startup, a legacy computer firm and an international collection of bulge bracket banks, the post-trade financial services company has begun the process of moving a significant part of its $1.5qn-worth of transaction workflow to a distributed ledger network.

With a contract announced today, IBM will help manage the process of moving $11tn worth of credit derivatives to a custom distributed ledger built by VC-backed startup, Axoni, under the advisement of banking consortium R3CEV.

The CEO of the DTCC's derivatives service subsidiary, Chris Childs, explained to CoinDesk how a network of nodes run by the counterparties of a transaction will be linked together to not only streamline post-trade processes, but save money as well.

He said:

"We believe our own internal savings will cost-justify the project. There are additional savings to the industry ... the estimates vary from one institution to another."

Over the course of the next year, the partners will work collaboratively to "re-platform" the DTCC's existing Trade Information Warehouse (TIW) for post-trade processing to a distributed ledger custom-built for cleared and bilateral credit derivatives.

For an idea of the scale of this operation, the TIW covers all major global derivatives dealers and 2,500 buy-side firms in 70 countries, according to DTCC data.

The DTCC hasn't shared the exact amount of money it believes could be saved by moving the transactions to a blockchain or distributed ledger, but a 2015 report by Santander estimated the global savings to banks more generally speaking could be as high as $20bn a year.

If this first large-scale implementation of a distributed ledger proves successful, there’s plenty of room to expand. The entire global credit derivatives market in 2016 was $544tn, according to the Bank for International Settlements, much of which is processed by the DTCC.

'Serious solution'

The distributed ledger technology being used for the project is called the AxCore protocol, created by New York-based Axoni, which last month raised $18m in venture capital.

Large participating firms will run their own individual "peer nodes" on the private ledger, with smaller DTCC clients being given the option to tap into DTCC’s own node.

Axoni founder and CEO Greg Schvey described the AxCore protocol as "widely deployed", revealing to CoinDesk that this same technology is currently being implemented to move $2tn worth of foreign exchange transactions for ICAP, which also participated in his startup's most recent round of venture funding.

Schvey explained that while the ledger itself is permissioned, it will not be exclusively controlled by the companies implementing the protocol.

"It enables a distributed network to be built on this where, ultimately, participants could have nodes in-house," said Schvey.

When the AxCore protocol goes live in early 2018, the startup intends to submit the software to Hyperledger, the business blockchain consortium that has taken on the role of overseeing the infrastructure for a range enterprise distributed ledger codebases.

Current market participants, including Barclays, Citi, Credit Suisse, Deutsche Bank, JP Morgan, UBS and Wells Fargo, helped develop the technology by providing workflow guidance. Infrastructure providers IHS Markit and Intercontinental Exchange also participated.

In conversation with CoinDesk, IBM research vice president of blockchain solutions Ramesh Gopinath described the partnership:

"If you think about where we were a year ago on blockchain, this is a serious industry-scale blockchain production solution. And guess what, the big kahunas in banking will be on this platform."

Everything in its right place

Though the scale of this project makes it the first of its kind, the team behind it has been coming together for over a year.

In December 2015, the DTCC, IBM, JP Morgan, and R3CEV were all founding members of the Linux Foundation-led blockchain consortium that would eventually be called Hyperledger.

Just a few months later, in February 2016, IBM unveiled its own blockchain strategy to help a wide range of businesses across industries capitalize on potential efficiencies provided by using a common, shared ledger.

By mid-2016, the DTCC submitted a request for proposal (RFP) for interested parties to "re-platform" the warehouse and cut back on reconciliation costs.

Now, IBM is the primary contract holder for the DTCC implementation, with "backing contracts" held between Axoni and IBM, and R3 and IBM, Gopinath said.

Gopinath noted that by the time the Axoni technology is fully implemented, the entire life-cycle of a credit derivative will be captured as a smart contract or a "suite of smart contracts".

"This is the ultimate in terms of capturing the entire business process – like we’ve always been talking about – on the blockchain," he said.

Send in the startups

But it won't just be the giants of banking involved.

Shortly after IBM unveiled its own blockchain strategy, the little-known Axoni emerged onto the scene, rather discreetly taking a leadership role in the construction and testing of a blockchain-based credit default swaps service with the DTCC, and test members the Bank of America, Merrill Lynch, Citi, Credit Suisse and JPMorgan.

Even at that early phase, Markit, which will also help craft the DTCC blockchain solution, was also participating.

The DTCC project will also move forward under the advisement of blockchain consortium R3CEV, which first emerged in July 2015 to help coordinate global banks looking to capitalize on blockchain and distributed ledger efficiencies.

Since then the consortium has grown to include 77 of the largest banks in the world, and through the development of its Corda protocol, overcome a series of obstacles to become one of the most recognizable names in blockchain.

R3 CEO and founder David Rutter positioned his company’s role as advisor to the DTCC project from both a technological perspective and from a banking workflow perspective.

Rutter told CoinDesk:

"It’s a combination of really helping validate that the architecture is sound, but also making sure that the feedback from this big R3 global network is heard."

'Goodbye, blockchain tourism'

Deployment of the AxCore protocol will be done in phases, and even after it goes live next year, may only be adopted slowly.

Initially, the distributed ledger will run in parallel with the existing settlement infrastructure, which can take as long as a week to close compared to the nearly instant settlement times expected from the blockchain solution.

But the goal is to eventually "retire" the existing TIW technology, according to Childs.

However, the CEO of DTCC’s derivatives service subsidiary added that one of the most desirable potential aspects of DLT might not be available early on.

In addition to providing streamlined processing by supporting self-executing code, or smart contracts, it is widely heralded as a bastion of transparency.

Since the distributed ledger's record is immutable, a regulatory node has the potential to give government observers access to real-time data about transactions, instead of having to wait for reports from market participants.

But in the DTCC’s current Trade Information Warehouse, regulators might not get reports at all. Disclosure is voluntary, according to Childs.

Opening up the fire hose of data to government controllers, he said, may not be so appealing to all involved.

"Clearly the capability of them being established as a node on the network exists with blockchain," said Childs. "But it's still very much to be determined."

Regardless of the progress still yet to be made, IBM’s Gopinath minced no words about what the complicated, multi-party partnership means to anyone building on a distributed ledger.

Gopinath concluded:

"Goodbye, blockchain tourism and hello blockchain systems that are large-scale. That turning point has happened."

DTCC image via Michael del Castillo; light rays image via Shutterstock

AxoniBankingBlockchain ApplicationsCapital MarketsDTCCIBMpost tradeR3CEV

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