Barclays DerivHack 2018 and How INDUSTRIA Got Awarded for Designing an Application for Smarter Derivatives Market Using Distributed Ledger Technology
Corda DLT is suitable for the creation of derivatives applications to run transactions across each other without compromising privacy and confidentiality and INDUSTRIA is the consultancy and development team to accelerate the adoption path.
On 20–21 September 2018 we took part in a prestigious and competitive hackathon, hosted by Barclays in Rise London. Other major partners to sponsor the 2018 Barclays DerivHack were Deloitte, ISDA, and Thomson Reuters . There were two Hackathon events ran in parallel. Seventeen teams participated in London and another thirteen in New York (each team consisted of up to four members). INDUSTRIA competed against other consultancy firms, verticals, platform providers, banks and got an award for ‘Best Pitch’ in London.
CDM (Common Domain Model) — The New Standard in the Derivatives Market
The derivatives industry body ISDA (International Swaps and Derivatives Association) has a new standard that defines the processes for derivatives transactions (such as interest rate swaps and credit default swaps). The aims of the industry body were to produce a common, robust, digital blueprint for how derivatives are traded and managed across their lifecycle. Establishing such digital data and processing standards could potentially lead to many benefits like reducing the need for continual reconciliations plus enabling consistency in regulatory compliance and reporting. Other gains might be the greater acceleration of automation and efficiency in the derivatives market and facilitating interoperability across firms and their IT platforms (at present information silos occur because market players have developed different systems using different business practices all leading to fragmentation and inefficiencies).
To address these inefficiencies ISDA has provided CDM — common foundation for new technologies to be implemented like distributed ledger, cloud and smart contracts to facilitate data consistency. The purpose of the Barclays DerivHack was to accelerate the adoption path of the DLT (Distributed Ledger Technology) technology that could lead to potential $2.5billion cost savings for the industry.
Corda — The Technology Solution for the Derivatives Market
In late August this year we were so happy at INDUSTRIA, because we became the newest partner of R3. Together with them, we envisioned a future where legal agreements such as business contracts (or in this case derivatives transactions such as interest rate and credit default swaps) are recorded and automatically managed without error, where all market players can transact seamlessly for any contractual purpose without friction.
Corda, the open-source platform, originally developed by R3 possesses an unique architecture — designed to model and automate real-world transactions in a legally enforceable manner. Originally designed for the Financial Services sector, Corda is now being adopted in supply chain network, healthcare, insurance, energy, trade and more.
One of the reasons for us to think that Corda is the best solutions for the creation of a smarter derivatives market is described by Richard G. Brown, Chief Technology Officer, R3 in the product whitepaper:
“Centralised market infrastructure utilities have gone some way towards increasing the amount of data and business-logic sharing between firms. But this development creates unfavourable tradeoffs of its own: such as the possibility of rent-seeking and inertia. This has been evidenced by how the world of financial transactions still lags far behind that which has been achieved in the realm of consumer and web based software since the advent of the web.”
DLT provides new opportunity to eradicate fragmentation and inefficiencies in the derivatives market and overthrow the multitude of expensive, non- interoperable, isolated systems that drive up cost, risk, duplication and error. The basic principles of Corda for privacy, assured identity, inclusion and immutability matches the requirements in the highly regulated environment of the financial services industry.
The architectures of existing blockchain systems such as Ethereum and NEO were unsuitable for the needs of restricted and carefully specified data sharing at the level of individual derivatives transactions with legal enforceability.
An important factor for INDUSTRIA to select the Corda platform for the Barclays DerivHack 2018 event was the counter-party inclusion. Parties are able to discover each other freely, and transact directly, in a single, open network. In contrast to other ‘permissioned’ blockchain platforms (like Hyperledger Fabric), the Corda Platform is intended to allow multiple groups of participants (and associated applications) to co-exist and interoperate across the same open network.
In Corda, smart contracts not only consist of code but additionally are allowed to contain legal prose. Therefore, the above smart legal contracts are legal prose that are formulated in a way that can be expressed and implemented in smart contract code. The rationale behind this is to give the code legitimacy that is rooted in the associated legal prose. In the beginning, we were not familiar with the ISDA’s Common Domain Model in details. However, our guess was that swaps and derivatives trade would require the implementation of legal text in the smart contract code.
How Was Barclays DerivHack 2018 Organised?
The participants in the hackathon weren’t all directly blockchain or banking related. Multiple teams entered the event in both locations (New York and London) with sizes from one person to four, each team included technology and business experts. Teams were from technology firms with varying backgrounds, some being users of ledger technology and others the builders and suppliers of the ledger platforms. There was broad participation across both the financial and blockchain industries. Originally IBM (now the Linux Foundation) supported Hyperledger Fabric developers, R3 for Corda (INDUSTRIA as one of them), Digital Asset had its own team, as did JP Morgan with Quorum (in New York).
Judges in London were selected from Barclays (Lee Braine Chief Technology Office), ISDA (Clive Ansell, Head of Market Infrastructure and Technology), JP Morgan, HSBC (Karen Everingham, Global Head of Fixed Income, Derivatives and Collateral Services), UBS (Ian Cusden, Technical Architect — Distributed Ledger Technologies), as well as REGnosys (Jim Wang, Senior Engineer) and universities (Andrei Kirilenko, Director of the Centre for Global Finance and Technology, Imperial College Business School and Christopher D. Clack, Senior Lecturer, University College London and Joint Field Chief Editor, Frontiers in Blockchain).
Before the hackathon event we received a substantial set of materials including CDM documentation, videos, two initial assignments (the rest were given at the event). Some of the tasks, necessary for the event were new to us and two days were not enough for us to complete all assignments and utilise CDM and the advantages Corda provides. We decided to redo the hackathon within our own organisation as a training exercise and learn more about the CDM and how effectively it can be coupled with Corda.
There were five assignments during the hackathon:
· Setting up counterparties on the platform
· Creating a new trades (rate swap and credit default swap) and setting additional counterparties
· Creation of trade events such as: A notional change, 3 and 4 way novations, partial & full terminations, rate resets, accruals and fee payments
· Providing settlements with payment netting
· Reporting on trades for a specific trade date, or the life history of a single trade
We managed to complete three of the given tasks. As an addition our team developed:
· Contract validation governing the evolution of the trade (as state in Corda)
· Simple user interface, using Python and Nginx plus really fancy-looking screens with jQuery
· We started working on CDM extension through contract and flow unit tests
Since we were relatively new to the derivatives market, our motivation was to participate in the hackathon was to learn and listen more. Our background is technology, so we wanted to see the implementation of Corda in a different real-world scenario.
We were delighted with the ‘Best Pitch’ award and a bit surprised, because we found the event to be extremely competitive. This recognition will additionally motivate us to invest more time and energy both in Corda and in the exploration of the CDM model.
Our Takeaways from the Hackathon
· Although in its early stages CDM has the potential to become an industry standard
· Corda DLT is well suited for the creation of derivatives applications to run transactions across each other without compromising privacy and confidentiality
· INDUSTRIA is the right consultancy and development team to accelerate the adoption path
· The efficiencies with the implementation of the DLT could potentially save the sector $2.5 billion a year
· Other industries (including non-financial ones) could similarly benefit from hackathons.