Today DZ Bank and Bayern LB announced they traded an over-the-counter (OTC) interest rate derivative as a smart contract using distributed ledger technology (DLT). The key benefits of the technology are automation and a reduction in counterparty risk.
The market for OTC interest rate derivatives is the largest in the world, more than four times the size of stock markets. Global equities are worth $109 trillion (source: WFE) and the notional amount of outstanding OTC interest rate derivatives was $466 trillion as of June 2020 (source: BIS).
A smart derivative contract is like a smart legal contract in that it’s legally binding. In this case, as interest rates move, the smart contract calculates the daily payment needed for the uncleared derivative, which is automatically processed via Deutsche Börse. If one of the parties fails to meet the agreed terms and conditions, the contract automatically terminates, reducing exposure to counterparty risks.
Article continues …
Want the full story? Pro subscribers get complete articles, exclusive industry analysis, and early access to legislative updates that keep you ahead of the competition. Join the professionals who are choosing deeper insights over surface level news.
