A group of five major banks, working with Thomson Reuters, IHS Markit and Axoni, have carried out a successful test of blockchain technology and smart contracts to manage affirmations and post-trade lifecycle processing for OTC equity swaps.
Barclays, Citi, Credit Suisse, JPMorgan and an unnamed tier one FS firm took part in the month-long experiment, led by capital markets tech startup Axoni and also joined by Capco.
The group established a blockchain trade processing network using hosted and locally-installed deployments of Axoni’s proprietary distributed ledger software, testing automated lifecycle management and synchronisation of single stock, index, and portfolio swaps.
The firms wanted to test blockchain tech because for certain types of equity swaps, independently-built systems at each major dealer require buy-side firms and their administrators to create complex, bespoke connectivity for each counterparty.
Axoni argues that 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.
So, the partners conducted 133 structured test cases to assess the functional and non-functional capabilities of blockchain technology for use with equity derivatives - hitting a 100% success rate across all 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 market data including equity prices, Libor rates, and corporate actions directly on the blockchain to enable the smart contracts’ automated workflows.
Roman Eisenberg, global head, prime services technology, Credit Suisse, says: "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. This can possibly present an opportunity to not only save costs but also reduce operational risks while growing the client offering."