Sibos 2018: Why asset service providers need DLT in derivatives

Creating the distributed ledger technology (DLT) for derivatives as an asset class will eliminate the differing interpretations of data within asset classes

SYDNEY, Sibos 2018 Sydney – As regulators require more transparency of financial data and transactions, asset servicers and technology providers are advocating the adoption of distributed ledger technology (DLT) in derivative space.

"There's been a lot of discussion about disruption in equities and fixed income. But these are very high value and very liquid markets. Because of that, the world has spent thirty years to build efficiency," says Robert Palatnick, chief technology architect at DTCC in an interview with The Asset at Sibos. "In derivative space, while the value of transactions is often very high, there is not as much volume as equities, for example, and the technology is not as efficient as in other asset classes. Because of this, there was more business value in moving derivatives transactions to DLT."

As fintech providers looked into the derivative market, credit derivatives such as credit default swaps (CDS) with standardized process flows and data models became an ideal test case for DLT. As a result, custodians and middleware companies have been working closely with fintech providers in aspects of payment calculations, settlement, credit event processing, restructuring events, rename events and reorganizations.

In 2006, DTCC established a lifecycle processing infrastructure for credit default swap called Trade Information Warehouse. According to Palatnick, a new system embedding DLT will go live in 2019.

"Each firm now has its own copy of data and its own technology, which must then be reconciled to other firms' systems and data. By leveraging a common, standardized set of technology and data, firms may able to remove some custom technology while increasing efficiency," says Palatnick, "After we implement DLT for CDS transactions, the longer term goal would be to add other swap asset classes such as equities swaps or commodity swaps. This would enable firms to leverage a single DLT model."

Lack of transparency in the derivative market was regarded as one underlying cause of the great financial crisis in 2008. In a bid to address the transparency issue, political leaders mandated the reduction of systemic risk through clearing, collateralization, capital requirement and reporting of over-the-counter (OTC) derivatives transactions in G20's meeting in Pittsburgh in 2009.

On top of service providers, buyside institutions are also able to leverage the public and standardized data to construct and execute their trading strategies.

"For different asset classes, they implemented (their strategies) differently. And not every firm interprets the data and the data rules exactly the same," says Palatnick. "For us, as we create the DLT for derivatives as an asset class, every one assesses exactly the same data and same rules."


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