The distributed ledger technology [DLT] helps to ‘record, share and synchronize transactions’ in their respective electronic ledger, making it more efficient, resilient and reliable. The blockchain is a type of distributed ledger.
Although blockchain and smart contracts were created to make the transactions more easy by tracking its data and also reducing the cost of derivatives trading, there are different varieties of formats and structures to track trades. Furthermore, if traders and banks have to adopt the distributed ledger technology, the whole system needs to be standardized. If a common method is not used, the whole purpose of using a ledger goes waste.
Lee Braine, the head of the project in Barclays’ investment banking division said:
“But what we haven’t yet seen is adoption of common standards by the industry. What we ultimately need in the derivatives space is multiple market infrastructures, including multiple clearing houses, adopting a common standard for data formats, reference data, transactional data, and business processes.”
contract works with a signal document which will have the values agreed by the ISDA and will be the same across all the banks, which not only saves time but also efforts. This also makes the banks work easy by not having to search through documents to find an old draft.
The banks involved could then populate the fields with the terms of the derivatives agreement such as the price with any changes being recorded. Those can then be seen online. Previously, a bank would have to search through its inbox or pile of documents to find an earlier version of the draft.
To solve these problems of data tracking and recording, the International Swaps and Derivatives Association [ISDA] proposed the common domain model [CDM] in May. Blockchain startups like R3 and Axoni support it. Barclays is the biggest champion of the common domain model, which can be used to make blockchain a reality.
In ISDA’s annual meeting in Florida, Barclays spoke about how smart contracts can be used with the common domain model [CDM] and also set up a CDM adoption working group. The working group estimated that if CDM is adopted, the efficiency gains would be around 25 percent in the clearing space. In an interview with CNBC, Lee Braine said:
“If that is centralized in some way, then you can imagine the banks negotiating, finalizing and signing off those and then being held centrally in one place, such as a web service. That would reduce the challenges the banks have with legal documentation.”