Eight firms announced today 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.
Axoni CEO Greg Schvey stated, “Complex contracts, a distributed market structure, and replicated workflows across many parties make blockchain technology a natural fit for equity derivatives. 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. It was a pleasure to work with exactly the type of influential and forward-thinking parties required to make this project impactful.”
Richard Evans, Head of Equities for EMEA at Barclays Investment Bank, commented “Industry collaboration is key in driving blockchain innovation and Barclays is keen to remain at the forefront of this. In this project, our investment bank’s Technology teams and CTO Office participated in collaborative testing of equity swaps smart contracts using simulated trades. We look forward to further
experimentation and innovation to bring the potential benefits of smart contracts technology to our
“The proof of concept has shown that blockchain technology lends itself well to solving for the operational complexity and volumes of Equity Swaps lifecycle processing,” said Roman Eisenberg, Global Head, Prime Services Technology, Credit Suisse. “This can possibly present an opportunity to not only save costs but also reduce operational risks while growing the client offering.”
Brad Levy, CEO of MarkitSERV and Global Head of Loans at IHS Markit, said, “Our work with Axoni and the industry demonstrates how distributed ledgers can provide elegant digital solutions in areas like equity derivatives that have persistent gaps in technology infrastructure. Having a shared ledger provided the synchronization required by the market and proved that blockchain can be highly complementary to MarkitSERV and other platforms already widely deployed in the derivatives market.”
Daniel Parsell, Managing Director of Equities Operations at J.P. Morgan, stated, “Distributed ledger technology is a key area of exploration for J.P. Morgan. Engaging in projects like Axoni’s has the potential to improve the bank’s internal efficiency and ultimately, our clients’ experience.”
“The collaboration here among our clients and partners demonstrates the best in co-innovation, where each of us played a critical part in advancing the possibilities for this emerging technology,” said Joyce Shen, Director of Emerging Tech Partnerships & Investments, Thomson Reuters. “This has exciting potential for workflows in the capital markets.”