Capital markets News

ASX, UBS, Digital Asset in derivatives DLT pilot with ISDA

derivatives trading

Today the International Swaps and Derivatives Association (ISDA) unveiled a pilot implementation of Common Domain Model (CDM), a digital standard that covers events and processes involved in processing derivative transactions. The CDM was introduced in 2018, but today’s iteration is focused on the clearing lifecycle.

Blockchain firm Digital Asset previously worked with ISDA to open source a version of CDM implemented in its DAML smart contract language. And the current pilot is also with Digital Asset, with input from UBS and Digital Asset client, the Australian Securities Exchange (ASX).

The CDM’s importance is reflected in the sheer size of the derivatives space compared to the stock and bond markets. Global stock markets are worth around $90 trillion. The open interest in exchange-traded derivatives for interest rate and foreign exchange is $85 trillion. Over the counter (OTC), foreign exchange derivatives amount to $92 trillion.

But the $449 trillion OTC interest rate derivatives market is the topic of the pilot.

Hence the impact of automating the back office transactions offers enormous benefits in terms of efficiencies, avoiding the need for manual reconciliations, but perhaps most of all, speed.

“Clearing is an essential part of the derivatives landscape, so it’s extremely important the operational processes are consistent to ensure seamless automation. Use of the CDM for clearing using DAML will increase standardization and operational efficiency across the entire clearing lifecycle,” said Ian Sloyan, Director of Market Infrastructure and Technology at ISDA.

In addition to implementing the existing CDM model for clearing, it adds new features for the signing of state transitions, data ownership and privacy elements.

The purpose of deploying the CDM for clearing on a distributed ledger is to facilitate interoperability. DAML has the advantage of natively supporting the new features and being compatible with several distributed ledger technologies (DLT), including Hyperledger Fabric, Besu and Sawtooth, R3;s Corda, VMware blockchain and others.

We previously explored the potential $2.5 billion benefits of industry-wide adoption of the CDM, at the time of a Barclays hosted hackathon back in 2018.

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