Several large financial institutions (JP Morgan, Citigroup, Bank of America, Credit Suisse Group) have participated in a blockchain trial involving credit-default swaps (CDS) derivative contracts.
The CDS contracts became well-known after the 2008 financial crisis, when the instruments were widely-used by banks and investment firms to gain exposure to the mortgage backed securities (MBSs) market.
According to a WSJ article, the experiment revealed that a certain portion of the clearing and settlement process of CDS contracts can be simplified using the novel technology. Chris Childs, CEO of the DTCC division that deals with OTC derivatives, said that the results of the test were “very positive”.
The test involved a simulation of the trading activity that took place in a 30-day trading period in a particular CDS instrument, which has a face value of $6.7 trillion for all outstanding contracts. The blockchain trial was conducted by trade data provider Markit, and Axoni, a blockchain developer that recently trialed a smart-contract Forex trading system for ICAP.
Markit has been involved with distributed ledgers for some time now, and Jeffrey Billingham – who heads the firm’s blockchain effort – said that this trial shows how the technology can be applied to “improve efficiencies and minimize costs.”
Autonomous Research analysts have postulated that distributed ledgers may cut trading costs by 33%, and reduce capital requirements by about $120 billion on a yearly basis.
While the technology has the potential to streamline the trading of just about any financial derivatives contract, it can also result in significant job losses:
“A recent report by Citigroup forecast that automation including blockchain could eliminate two million banking jobs, largely in processing, over the next decade.”
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