Blockchain technology shows its potential application in complex world of credit default swaps
Another win for blockchain enthusiasts this week as seven major financial institutions including clearing and settlement giant DTCC, JPMorgan, Credit Suisse, Bank of America, Merrill Lynch and Citi complete a blockchain test for post-trade processes associated with credit default swaps. The test, conducted in conjunction with financial information company Markit, and blockchain specialists Axoni successfully illustrated that part of the record keeping tasks in the credit default swap process could be run on a blockchain distributed ledger.
Credit default swaps, which act as insurance against bad loans, were chosen for the test because of their high-level post trade complexity. To conduct the test, Markit generated smart contracts from CDS trade confirmations. Overall, the participants conducted 85 structured test cases to assess functionality, integration, network resiliency, and data privacy. The Axoni implementation achieved an impressive 100% success rate across all trials.
Shortly after the tests were completed, Chris Childs, CEO of DTCC 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, assessed and implemented consistently. We look forward to future collaboration with the industry on innovative ways to leverage this technology to reduce costs and increase efficiencies in the post-trade process.”
Brad Levy, managing director & head of Markit’s Processing division, said, “This collaboration in CDS illustrates how smart contracts can facilitate higher levels of automation in OTC markets. The success of this initiative reinforces our commitment to continued development of blockchain technology in CDS, other asset classes and financial industry processes more generally.”
Despite some details still to be worked out, the successful trial bodes well for blockchain startups and enthusiasts who have been touting the technologies potential within mainstream finance. As more banks and financial institutions witness the benefits of blockchain technology, industry implementation moves a little closer to reality.