7 Wall Street Firms Test Blockchain for Credit Default Swaps

Credit default swaps and blockchain capabilities come together in a successful test announced by the DTCC, J.P. Morgan, Markit, and others.

AccessTimeIconApr 7, 2016 at 2:26 p.m. UTC
Updated Sep 11, 2021 at 12:13 p.m. UTC

Seven firms representing various stakeholders in the credit default swaps trading process today announced they successfully tested replicating the process using blockchain technology.

The announcement is the latest that signals an acceleration of the rate at which financial incumbents are embracing both blockchain technology and distributed ledgers.

In a statement, Chris Childs, CEO of the Depository Trust & Clearing Corporation’s (DTCC) OTC derivatives segment, said the test’s diverse group of partners was fundamental to its success.

Childs said:

"Blockchain and distributed ledger technology has the potential to revolutionize highly manual, complex processes across global financial markets. This test reinforces that collaboration among service providers will be critical to ensuring the technology is harnessed."

Other test members included financial institutions, Bank of America, Merrill Lynch, Citi, Credit Suisse and JPMorgan; financial information company Markit, and distributed ledger specialists Axoni.

The test announced today began in early March and included 85 structured test cases to asses the network’s functionality, resiliency and data privacy.

According to the statement, the implementation achieved a 100% success rate across the tests.

The tests

For the test, Markit generated smart contracts from credit default swap trade confirmations, including the economic terms of the deal and permissions management into a blockchain-based system.

The companies did not disclose which blockchain or ledger systems were used as part of the trial, though only a few firms currently offer support for smart contracts, with Symbiont and Ethereum being perhaps the most notable.

According to the statement, the test showed that regulators could view in "real time" a wide range of financial events including trade details, counterparty risk metrics, and exposure to reference entities.

“Our experiments with Axoni demonstrate that confidentiality and privacy can be preserved between bilateral parties on an immutable distributed ledger at scale," said Emmanuel Aidoo, who is in charge of the blockchain and distributed ledgers at Credit Suisse, in a statement.

Over the course of the months-long project, the group said it built its network using Axoni-hosted software that was installed locally.

Rising frequency of blockchain work

The work comes on the heels of the DTCC's news last week that it would partner with industry startup Digital Asset Holdings on a trial centered on using blockchain tech as part of the repo trading process.

Further, the DTCC’s counterpart in London, ICAP, recently announced it had completed a post-trade blockchain trial of its own, a test that was conducted in partnership with Axoni.

Big announcements have been equally frequent from startups seeking to provide technology solutions on which financial institutions can build.

For example, banking consortium R3CEV announced it was working on its own distributed ledger called Corda, which is inspired by blockchain characteristics, but modified to meet demands unique to the financial industry.

Disclaimer: CoinDesk is a subsidiary of Digital Currency Group, which is an investor in TradeBlock, the parent firm of Axoni.

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