DTCC Explores Gatekeeper Role for DLT Networks

As financial institutions consider the value of distributed ledger technology and its potential to trade and settle tokenized assets, the Depository Trust and Clearing Corporation (DTCC) wants in on the action.

Jennifer Peve, head of business development and fintech strategy at DTCC, tells WatersTechnology that the market structure firm is interested in acting as a central counterparty for trading networks that are built on permission-based blockchains, a subset of DLT. Peve says the firm is looking to work with industry participants that are signing up for DLT networks, including those interested in trading and settling digital assets. In these cases, the DTCC would seek to function as a third-party firm that governs and maintains the platform, rather than having the provider run the technology once it’s built.

“Once counterparty firms have designed and developed their DLT initiatives, they may look for an independent third party capable of providing the operational processing necessary to manage the network and to oversee the participants on the network,” Peve says.

The DTCC is keen to engage with industry firms to discuss the type of service or role it would play. According to Peve, the DTCC could be responsible for the governance, functionality, deployment, and testing of the platform. She adds that it could manage, replace or execute code for smart contracts, as one example.

The latest plans follow the DLT Governance Networks whitepaper, published by the DTCC and Accenture in September 2019, which discussed how the partnering firms have developed a governance model for operating an enterprise-wide DLT initiative, covering critical functions, adoption, security, risks, and regulatory compliance.

The paper points to DTCC’s position in the industry as a central regulated entity for clearing and settlement, and that it can provide a governance framework and principles for highly regulated, trusted infrastructures. The framework addressed approaches to managing activity, connectivity, software changes, contractual agreements and settlement for all participants on the network.

However, as the technology evolves and more challenges begin to emerge, DTCC will aim to fine-tune the governance model; this could include having an open-source concept for developing DLT networks, or a forum for sharing industry ideas.

“We are open to the industry working with us to further refine the model and share ideas around how to create a more robust multi-governance model,” Peve adds.

In early September, the DTCC announced the development of its DLT governance tool, DLT AdMon, which enables clients to view ledger activity and performance when connected to a node on the DLT network. The tool was developed with open-sourced code from the Hyperledger Explorer module.

Lessons Learned and New Deadlines

This initiative is growing out of DTCC’s own experience with DLT, as it replaces its Trade Information Warehouse (TIW) system with a blockchain-based platform jointly built by IBM, Axoni and the industry consortium R3. The TIW platform, which handles the $12 trillion credit derivatives market, is one of the most ambitious industry-wide blockchain projects to date.

The implementation has faced several delays over the years, mostly because the technology is so complex. The TIW deadline has been pushed to March 2020 due to client requests, as the DTCC braces for a series of far-reaching global changes from Brexit, the Commodity Futures Trading Commission’s review of its swaps regulatory framework in the US and the re-architecture of DTCC’s North American data center, impacting the US and Canada’s swaps reporting.

Peve says a core challenge of the technology are its ability to run complex processes, such as the structuring of credit events for credit default swaps. Performance capabilities have long been cited as one of the main barriers to the adoption of DLT for large-scale, multi-party implementations. However, as the TIW project evolves and industry firms continue to provide feedback, Peve says that DTCC continues to learn the best applications for the technology.

“Over the course of the deployment and interim UAT [user acceptance testing] environment, we have developed an understanding of which processes are better suited to on-chain versus off-chain, because those types of decisions ultimately impact performance, a key consideration when evaluating suitability for production,” Peve says.