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Blockchain receives its first big test case

The world’s main repository for data on credit derivatives deals will move its database on to the blockchain, in the first big test case for whether the emerging technology can be employed across the finance industry.

The DTCC, a US post-trade services group that processes more than $1,500tn of securities a year, will use technology from IBM and US blockchain start-ups R3 and Axoni as the basis for its next-generation trade information warehouse. The unit settles payments in credit default swaps in multiple currencies. Work is expected to begin this month and go live in about a year’s time, the company announced on Monday.

The decision marks a further advance into global markets by blockchain, a decentralised electronic ledger with records stored in “blocks”. The move — which the DTCC says will reduce operating costs — represents an acid test for the technology that will be closely watched by a banking sector looking to make cost savings in an era of low interest rates and tougher regulation.

Many banks have tried to launch their own blockchain ventures but have struggled to make headway in an industry that has historically kept all information closely guarded to gain an advantage.

Seven large banks including Barclays, Citi, JPMorgan, and UBS have provided guidance on the DTCC’s venture, as did IHS Markit and Intercontinental Exchange, the world’s largest credit data provider and CDS clearing house respectively.

The widespread industry buy-in comes as financial institutions grapple to move beyond prototyping blockchain’s shared database technology — and apply it with the hope of automating back-office functions. Blockchain advocates say it could save banks billions of dollars, but many have so far struggled with the practicalities of scaling up the technology and wielding it within the norms of the sector.

“These are critical tests to see if we can achieve the benefits that everyone believes exists through the digital ledger,” said Michael Bodson, president and chief executive of the DTCC. Introducing blockchain technology to a “fairly self-contained” post-trade market will help determine whether it can be applied “on a grander scale” across the finance sector, he said in an interview.

The DTCC’s warehouse electronically captures information about trades — such as who traded what, with whom and at what price — for about 98 per cent of all credit derivative transactions globally, with a notional value of about $11tn. The system is also used for handling default payments on transactions and works in partnership with CLS Bank, the world’s largest FX settlement service.

“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 at IBM Industry Platforms, the unit that focuses on blockchain technology.

Mr Bodson said the new platform would, in time, also result in lower costs for clients.

The introduction of blockchain technology to the warehouse follows the success of an initial “proof of concept” for North American single-name CDS last year.

In 2016, the DTCC also announced that it was working with Digital Asset Holdings, a start-up led by former JPMorgan executive Blythe Masters, to explore the application of blockchain in the clearing and settlement of some US repo transactions.

IBM will lead the initiative while Axoni will provide distributed ledger infrastructure and smart contract applications, with R3 — a consortium of more than 50 banks — acting as a adviser. It will be submitted to the Hyperledger open source platform when it goes live next year.

Greg Schvey, chief executive of Axoni, described the venture as “a watershed moment for the industry”.

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