German banks complete OTC interest rate derivatives trade using digital smart contract
29 June 2021 Germany
Image: friedemann kiersch/EyeEm/adobe.stock.com
German credit institutions DZ Bank and BayernLB have traded an over-the-counter (OTC) interest rate derivative as a digital smart derivative contract (SDC), the first time this has been completed according to the two counterparties.
The trading parties handled the full lifecycle of the OTC derivative transaction over a number of days through an automated and legally-binding process, demonstrating that such a trade can be delivered digitally.
The transaction was completed using distributed ledger technology (DLT), with Eurex Clearing, Deutsche B枚rse鈥檚 central counterparty (CCP) service, acting as neutral account manager for credit exposures from this non-cleared OTC derivative transaction.
Successful completion of this interest rate derivative trade confirmed the advantages of smart derivative contracts, according to the project participants. Market value for the transaction is calculated using a valuation model agreed in the derivative contract and outstanding obligations are settled through automated booking on a daily basis.
Smart derivative contracts offer protection against credit risk, they note, with automatic contract termination being enacted if a counterparty cannot meet their settlement obligations. Moreover, the trial indicates that DLT technology provides an efficient mechanism for verifying transaction data, for minimising reconciliation challenges and for supporting automated settlement of counterparty obligations.
The project was implemented in collaboration with the Ludwig Maximillan University of Munich and law firm Jones Day. Project participants now intend to conduct OTC derivative trades with a wider set of market participants, including buy-side firms.
DZ BANK board member for capital markets Wolfgang K枚hler, says: 鈥淭he successful trial of the smart derivative contract shows how we can develop efficient and innovative capital market products with the help of new technologies.鈥�
鈥淲e are making an important contribution to the digitalisation, homogenisation and automation of settlement processes of OTC derivatives on the capital market and the project creates opportunities to reduce regulatory costs,鈥� adds K枚hler.
Jens Hachmeister, Deutsche B枚rse鈥檚 head of issuance and new digital markets, says: 鈥淒LT-based solutions are suitable for significantly improving the security and efficiency of products and processes on the capital market - especially in the off-exchange area. Smart derivative contracts and automated payment settlement via DLT are promising use cases here. As a neutral account manager, Deutsche B枚rse also ensures trust and efficiency in the decentralised financial markets.鈥�
The trading parties handled the full lifecycle of the OTC derivative transaction over a number of days through an automated and legally-binding process, demonstrating that such a trade can be delivered digitally.
The transaction was completed using distributed ledger technology (DLT), with Eurex Clearing, Deutsche B枚rse鈥檚 central counterparty (CCP) service, acting as neutral account manager for credit exposures from this non-cleared OTC derivative transaction.
Successful completion of this interest rate derivative trade confirmed the advantages of smart derivative contracts, according to the project participants. Market value for the transaction is calculated using a valuation model agreed in the derivative contract and outstanding obligations are settled through automated booking on a daily basis.
Smart derivative contracts offer protection against credit risk, they note, with automatic contract termination being enacted if a counterparty cannot meet their settlement obligations. Moreover, the trial indicates that DLT technology provides an efficient mechanism for verifying transaction data, for minimising reconciliation challenges and for supporting automated settlement of counterparty obligations.
The project was implemented in collaboration with the Ludwig Maximillan University of Munich and law firm Jones Day. Project participants now intend to conduct OTC derivative trades with a wider set of market participants, including buy-side firms.
DZ BANK board member for capital markets Wolfgang K枚hler, says: 鈥淭he successful trial of the smart derivative contract shows how we can develop efficient and innovative capital market products with the help of new technologies.鈥�
鈥淲e are making an important contribution to the digitalisation, homogenisation and automation of settlement processes of OTC derivatives on the capital market and the project creates opportunities to reduce regulatory costs,鈥� adds K枚hler.
Jens Hachmeister, Deutsche B枚rse鈥檚 head of issuance and new digital markets, says: 鈥淒LT-based solutions are suitable for significantly improving the security and efficiency of products and processes on the capital market - especially in the off-exchange area. Smart derivative contracts and automated payment settlement via DLT are promising use cases here. As a neutral account manager, Deutsche B枚rse also ensures trust and efficiency in the decentralised financial markets.鈥�
← Previous derivatives article
DTCC to act as sole trade reporting service under new Singapore regulations
DTCC to act as sole trade reporting service under new Singapore regulations
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to 网爆吃瓜 Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to 网爆吃瓜 Finance Times
