Ledger tech primed for CDS post-trade processing

New research has found that distributed ledger technology may be equipped for CDS post-trade activities.
By Paul Walsh
Successful testing has shown that distributed ledger technology (DLT) can soon be used in the post-trade processing of credit default swaps, according to new research.

A Celent and Misys whitepaper entitled ‘Beyond the Buzz’ revealed that a recent successful test of DLT should be regarded as a proof of concept and suggests its potential in a capital markets context.

Details of the test revealed that participants including Bank of America Merrill Lynch, Citi, Credit Suisse and JP Morgan implemented DLT in post-trade processing of standard North American single name CDS.

As part of the test, smart contracts were generated from CDS trade confirmations, with economic terms of CDS embedded into the contracts to manage permissions and event processing.

The results showed a 100% success rate across 85 test cases.

As a result of such developments, the paper advocates that “smart contracts are efficient in managing complex events inherent in CDS” and that this result is “highly constructive”.

Additional analysis from the paper suggests that the real-time risk analytics achieved from smart contracts would prove significant from a regulatory point of view as well as suggesting that implementing such technology would lead to greater clarity over cost savings for post-trade processes.

DLT has been hailed by custodians as being the future of the industry with potential to streamline processes such as settlement, clearing and corporate actions.

Speaking at London’s FinTech week in July, panellists concluded that smart contracts used in conjunction with blockchain technology could be the key to making major efficiency savings.