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Major Wall Street Clearinghouse DTCC to Develop Operational Blockchain Network for Derivatives

The Depository Trust & Clearing Corporation (DTCC) announced that it has selected IBM, in partnership with Axoni and R3, to provide a distributed ledger technology framework for post-trade derivatives processing, including credit default swaps. The final goal of the project is to develop a permissioned distributed ledger network for derivatives, governed by DTCC, with peer nodes at participating firms.

“A big Wall Street middleman is bringing in the technology behind the digital currency bitcoin to try to save banks tens of millions of dollars on fees for derivatives trades,” notes the Wall Street Journal.

“IBM, Axoni and R3 offer valued DLT expertise as well as a strong commitment to the Hyperledger community and industry standards,” said Chris Childs, CEO of DTCC Deriv/SERV, a DTCC unit that provides automated repository and asset servicing for over-the counter (OTC) credit derivatives trades. “We are pleased that they have chosen to leverage their collective expertise and collaborate with us on this initiative, which will allow us to build the best solution for the marketplace while minimizing cost to the industry and expediting our speed to market.”

DTCC, established in 1999, focuses on post-trade financial services, providing clearing and settlement services to the financial markets. It provides central custody of securities and ways for buyers and sellers to make their exchanges in a safe and efficient way. In 2011, DTCC settled the vast majority of securities transactions in the United States and close to $1.7 quadrillion in value worldwide, making it by far the highest financial value processor in the world.

DTCC is a member of Hyperledger, a high-profile, open-source blockchain development project managed by The Linux Foundation and aimed at driving the adoption and standardization of distributed ledger technology in the financial services sector. In 2016, DTCC participated in a $52 million funding round for Digital Asset Holdings, a blockchain-oriented financial services firm headed by Wall Street veteran Blythe Masters and a founding member of Hyperledger. Soon after, the two firms started a collaboration to develop and test blockchain-based solutions for the $2.6 trillion repurchase agreement (repo) market.

According to DTCC CEO Michael Bodson, there has not yet been a major practical deployment of blockchain technology, which has never been used in any form of any significance other than Bitcoin. “This will be one of the first [instances] globally where we are using distributed ledger technology to become a piece of the infrastructure in a very critical market, in the credit default swaps market, and use it across the entirety of multiple players,” said Bodson, as reported by Forbes. “By recording transactions in a distributed ledger, everyone uses that same piece of information, that same trade batch, in the same exact way.”

"As one of the largest and most groundbreaking distributed ledger projects to date in the financial services industry, DTCC together with its member banks are reimagining the credit derivatives process,” said Bridget van Kralingen, Senior Vice President, IBM Industry Platforms. “The combined expertise of IBM and our partners enables us to provide DTCC with a resilient, open and innovative new technology platform to support this groundbreaking opportunity."

DTCC and its partners will add a distributed ledger based on blockchain technology to DTCC’s Trade Information Warehouse (TIW), an existing platform that automates record keeping, lifecycle events and payment management for more than $11 trillion of cleared and bilateral credit derivatives. IBM will manage the project and offer the solution-as-a-service. R3 will act as a solution advisor, and Axoni will provide distributed ledger infrastructure and smart contract applications.

“Distributed ledger technology is a natural fit for derivatives processing,” said David Rutter, CEO of R3.

“Deploying distributed ledger technology in production at this scale is a watershed moment for the industry,” added Greg Schvey, CEO of Axoni.

Bodson stated that previous Proof of Concept showed that distributed ledger technology can handle all the various types of transactions with adequate throughput. Upon launch, the DTCC will run a node that updates the TIW ledger, and other participants will also be able to run a node to support the network or to just get a feed of the information.

It seems likely that the DTCC initiative, once it becomes operational, could have a significant impact on Wall Street and open doors to massive adoption of distributed ledger technology for financial services.

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