Yesterday Korea Times reported that Korea’s Shinhan Bank is using blockchain, including for internal functionality. The bank adopted blockchain including smart contracts for Interest Rate Swaps (IRS) on November 30th.
IRS are types of derivatives that usually enable parties to swap exposure to a variable interest rate with a fixed interest rate. Hence they’re used for hedging. The derivatives market reached $612 trillion last year (source: BIS) and is three times the size of the combined global equities and bond markets.
“Prior to the blockchain-based process, there had been no standardized rules governing keeping and managing financial records, a reason why market participants had to rely on their own records which often times led to errors despite the cross-checking process requirement,” a Shinhan official said.
“The new system helps remove such human errors and helps improve work efficiency through clearer, task-related communications rather than wasting time on correcting mistakes.”
There’s quite a bit of activity around derivatives and blockchain, perhaps because the cost savings potential has been estimated in the billions. ISDA the derivatives trade association recently created a new standard, the Common Domain Model (CDM) targeted at blockchain and other technologies.
Three months ago Barclays hosted a hackathon to try out the new standard, and most of the significant financial sector blockchain companies participated.
Lee Braine from the Chief Technology Office at Barclays explained the thinking behind ISDA’s new standard: “Across the post-trade derivatives industry, there is infrastructure deployed that is too complex for its current purpose, and the proposal is analogous to pressing a technology ‘reset button’ allowing you to go back and radically simplify the nature of that infrastructure.”
Shortly after the hackathon Baton Systems, one of the hackathon winners announced their systems now support the new standard.
A month ago, the DTCC the massive U.S. clearing company announced it was in the test phase for its updated credit derivatives Trade Information Warehouse (TIW) which now leverages blockchain using Axoni’s technology. The platform s expected to launch in Q2 2019. TIW processes $9.9 trillion of cleared and bilateral derivatives a year.