CDS are financial derivatives that help bondholders to hedge themselves against losses in their bond holdings by acting as a form of insurance. In the event of a bond default, the CDS will pay out the difference between the bond’s recovery value and its face value to the CDS buyer. To have this insurance, the CDS holder pays a series of small fees known as “spreads.”
The DTCC’s new CDS reporting solution will launch in shadow mode and run alongside currently existing post-trade infrastructure.
The new system's integration will be implemented in three phases. First, participants would have access through the DTCC's connection point or "node." In the second step, the DTCC would provide nodes to its participating firms on the permissioned distributed ledger: this would allow them to access information and validate reported clearing data directly. The final phase would see the companies replace their own systems with the new technology, removing the nodes and increasing efficiency.
With an already established network of firms submitting trades, applying blockchain technology to the DTCC's existing business model should achieve its intended outcome of providing governance and risk management, as well as improving operations, to its participating firms.
Given the number of distributed ledger technology trials and projects underway in the financial industry, the DTCC’s new CDS reporting platform can be considered an important test for blockchain technology’s real-world applicability on Wall Street. As distributed ledger technology still lacks standards, regulations and widespread interoperability with existing industry systems, it will be interesting to see how the DTCC’s new solution will perform and how the financial industry will respond to it.