Eleven global firms have successfully completed the second phase of blockchain based equity swap transactions and related post-trade lifecycle events. Axoni, a start-up managing the blockchain aspect, said:
“The pilot expanded the blockchain network to process equity swap lifecycle events, end-to-end. Having both sides of a swap transaction on the same ledger allows counterparties to simultaneously view and share data during the entire lifecycle of the swap – from proposal to termination.
This synchronization of data, increased transparency of calculation logic, and automation of corporate actions processing will reduce operational costs and errors and allow real-time data access for both client and regulatory reporting.”
Little detail is provided on the underlying technology called AxCore, Axoni’s proprietary distributed ledger software.
It is a permissioned blockchain, with its participants running a node to join the network, and since it is proprietary, it is presumably close sourced.
Their permissioned blockchain has smart contracts, but it’s unclear whether they are based on Ethereum or Hyperledger, with little public information provided.
However, the start-ups says AxCore was useful for equity swaps, a trade process whereby you swap say $1 million plus interest for $1 million worth of FTSE stocks, so receiving gains from any price appreciation.
“Equity swap data is infamously complex and difficult to manage, making it a terrific fit for distributed ledger technology. We’re delighted to have reached another key milestone alongside our partners on this project and grateful for their collaborative efforts to demonstrate how powerful this tech can be,” said Greg Schvey, CEO of Axoni.
All tests were 100% successful, the start-up says, with the smart contracts using data feeds from Thomson Reuters which provided equity prices, FX rates, benchmark rates, and corporate actions directly on the blockchain.
“The seamless integration of market data is critical to the success of this and similar projects and we have been impressed with the solution that has resulted. We look forward to helping the project move to the next phase,” said Tim Baker, Global Head of Innovation at Thomson Reuters.
The multi-month pilot tested “automated lifecycle management and synchronization of single stock and portfolio total return swaps, as well as critical components regarding the deployment and management of the distributed ledger network,” Axoni says.
Which suggests progress is being made in implementing blockchain technology, moving from proof of concepts to pilots with potentially real production projects launched next year.
This specific project included eleven multinational companies, which may be employing blockchain technology to bypass clearing houses and distribute trust.
The participants are BNP Paribas, Citi, Credit Suisse, Canada Pension Plan Investment Board, Goldman Sachs, J.P. Morgan as well as industry service providers IHS Markit and Thomson Reuters. ISDA provided equity derivatives documentation expertise and Capco provided consulting services.
The project used a “standardized equity swap confirmation and trade template based on a 2011 ISDA Equity Derivatives Definitions framework,” standardizing equity swaps.
As smart contracts are if:then code based contracts of sorts, that template has seemingly been translated into code, allowing for automatic execution through interaction with the data feeds based on the conditions set out in the contract.
The permissioned nodes, presumably 11 in this case one for each participant or perhaps slightly more, then ensure that the smart contract is following the rules, thus needing no central database or authority to verify execution or reconciliate data if they go out of synch.
Their distributed nature should increase security as you need to compromise the majority of them, rather than just one, while taking humans out of much of the process, with the code and its underlying algorithm so automatically handling transactions.
All that should lead to considerable reduction in costs while significantly increasing trading speed, explaining the vast interest in blockchain technology since 2016, with it all exploding this year.