IBM Partners With Wall Street to Bring Blockchain to CDS Market

  • DTCC leads effort to move CDS management to blockchain by 2018
  • JPmorgan, UBS gave input to update $11.7 trillion CDS market

QuickTake: Bitcoin and the Blockchain

Wall Street’s largest back-office processing service is partnering with IBM to upgrade how payments and record-keeping for credit-default swaps are handled by putting the system on a blockchain by early next year.

Depository Trust & Clearing Corp., the New York-based utility that settles and clears all stock and bond trades in the U.S., is seeking to reduce redundancies and cut costs in the system that manages $11.7 trillion in outstanding credit swaps, the company said in a statement Monday. International Business Machines Corp., as well as blockchain startups R3 and Axoni, will help DTCC create the single network of credit-swaps users.

The shift is similar to a plan by Digital Asset Holdings to move all clearing and settlement of stocks on the Australian Stock Exchange to a blockchain, which is also referred to as a distributed ledger. Wall Street has been seeking ways to use distributed ledgers for the past several years as a way to cut costs by speeding up securities and derivatives settlement times. Just over a decade ago in the credit-swap market, for example, backlogs of up to 17 days’ worth of trading built up before the market became electronic.

“It was very paper intensive, there were all sorts of issues,” said Mike Bodson, chief executive officer of DTCC. Trade processing is now done electronically, but banks and money managers maintain their own record of trade details in private databases. That means details must be reconciled among the different users, which takes time and can be error-prone. A distributed ledger, on the other hand, allows all those users to share the same exact data so that confirmations, payments and other processing can be done in seconds rather than days.

“You use one form of that information for everybody,” Bodson said.

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Distributed-ledger technology has captivated Wall Street executives because it could process virtually any kind of trade or money transfer in minutes rather than days. That vastly reduces the amount of capital that must be set aside until transactions are settled. Industries such as health care, supply-chain management and mining are also experimenting with the software to improve efficiency or ensure the provenance of diamonds, for example.

Credit swaps are a ripe target as they require a lot of maintenance after the deals are struck. The contracts allow investors to hedge against or speculate on whether companies or governments will default on their debt. Sellers of CDS receive periodic payments from buyers similar to insurance premiums. If a company or government defaults, the CDS seller is required to pay the buyer the amount needed to value the failed bonds at 100 cents on the dollar.

JPMorgan, UBS

In the DTCC plan, all of those various payments and events would be managed through the distributed ledger. DTCC would be one member of the network, while firms such as Barclays Plc, JPMorgan Chase & Co., UBS Group AG, Intercontinental Exchange Inc. and IHS Markit Ltd. -- all of which worked with DTCC and IBM to develop the system -- are expected to join, Bodson said.

“In financial markets, blockchain adoption is happening in a big way. There’s no doubt in my mind,” said Ramesh Gopinath, IBM’s vice president of blockchain solutions. While a lot of hype has surrounded distributed ledgers, what he called “blockchain tourism,” real projects are now under way, Gopinath said.

“The whole promise of a blockchain is you create a network and you can use the network for a bunch of services,” he said. “Blockchain networks are being born.”

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