Digital Asset and Isda Create Rosetta Stone for Derivatives Smart Contracts

Industry efforts to digitize derivatives trading have progressed steadily, but cumbersome post-trade processes have often proved to be a roadblock. Now, two of the largest entities in this space believe they may have cracked the code.

The International Swaps and Derivatives Association (Isda) and Digital Asset have announced an open-source reference code library, which they say will accelerate the adoption of Isda’s digitization project, known as the Common Domain Model (CDM). The initial form of the library is focused on DAML, Digital Asset’s proprietary programming language.

“The specification module we have built is a reference library that we’ve created using DAML that will simplify and standardize the generation of those lifecycle events for a derivatives transaction,” says Kelly Mathieson, head of enterprise solutions at Digital Asset. “By doing that, it will allow developers to unambiguously construct lifecycle events with a machine-executable specification.”

These events, such as calculating interest amounts and payments, are often handled manually today. With CDM, Isda is building a machine-readable representation of these processes. Linking this to DAML will allow for interoperability with distributed-ledger technology (DLT) and the use of smart contracts—self-executing code that can mimic processes such as margin calls or coupon payments, but which require standardized processes and machine-readable information to function, all of which must function to the same specification.

This, the two parties hope, will allow greater automation within CDM projects by creating a core set of templates for handling lifecycle events in a derivatives trade.

“There is an opportunity for derivatives market participants who are direct participants to leverage it for their operating processes and their risk-management governance of those lifecycle events, but also for providers of those services from either an agency or custody perspective to handle the actions and the reporting of those events,” Mathieson adds.

Functional Focus

Work has been progressing on the CDM for over a year, with the first version being made publicly available in June 2018. While the project will deal with rates and credit, to begin with, it will move into collateral, reporting and equity derivatives, as well as swaps and potentially currencies, in the future. In addition to its work on the reference code library, Digital Asset will also make its digital expression of a swaps trade using the CDM public.

The initial inclusion of DAML rather than other languages is not coincidental—Digital Asset won Isda’s DerivHack CDM hackathon event, held in London on September 1 and 2, 2018. The winning project in question was for a front-office task—contract negotiation—given CDM’s eventual move beyond post-trade processing.

“The CDM is applicable beyond post-trade processes. At DerivHack, we modeled a contract negotiation process, which serves as a basis that could be extended into the front office,” said Viv Diwakar, a member of the Digital Asset team who participated in the hackathon, speaking to WatersTechnology’s sister title, Risk.net.

Mathieson says that while the library will initially be specific to DAML, the smart contract language used by Digital Asset, the vendor has also translated it into Haskell. Both are functional programming languages, which have seen growing adoption among financial firms of all stripes in recent years. The use of DAML, in particular, is set to rise given Digital Asset’s involvement with the replacement of the Australian Securities Exchange’s equity settlement system, Chess, with a DLT platform.

DLT is also being used for a number of other significant projects globally. The Depository Trust and Clearing Corp., for instance, is partnering with IBM, R3 and Axoni to re-engineer its Trade Information Warehouse—the primary processing center for credit derivatives trades—using DLT. The project is currently scheduled to go live in late 2019, and requires interoperability with other critical platforms, including MarkitSERV’s TradeServ. Likewise, CLS is exploring the technology’s potential use for currency trading settlements.

In addition, the CDM project as a whole, while focused on streamlining and standardizing post-trade processes for derivatives trading in general, is specifically targeted at DLT.

“If you look at the current state, you’ve got silos of data with messaging between them. Common standards are enforced strictly on the messaging protocols, but not on the hosted data or the business processes that are run separately within each firm,” said Lee Braine, a DLT specialist within the chief technology office at Barclays, speaking to Risk.net. “We don’t want that same scenario to migrate across to blockchain. We envisage interoperability of business processes across DLT platforms—from Ethereum, to Corda, to Fabric, to Digital Asset Platform.”

Participants at the hackathon estimated that the CDM project has the potential to save the industry around $3 billion per year at a minimum by standardizing and automating lifecycle events, which are currently manual, fragmented and highly specific to each dealer.