Barclays Bank introduces blockchain technology to derivatives trading

Rage Comment : Barclays is testing smart contract technology for derivatives trading, and alliances of large global banks are also developing blockchain-related technologies. The International Swaps and Derivatives Association (ISDA) is establishing derivatives trading standards in the financial sector. Because smart contracts are still underdeveloped, the lack of precise definitions and specific operating methods of the technology is a great challenge to its large-scale use. Regulators and standard-setting organizations in various industries need to come together to give the technology a common definition. Barclays hopes that ISDA will become the publisher of this unified smart contract.

Translation: Annie_Xu

Barclays is testing smart contract technology for derivatives trading, and a coalition of large global banks is also developing blockchain-related technologies.

Derivatives are essentially trading contracts between two or more parties, have a certain asset base, and can take many forms.

There are currently three main components to such contracts, and the International Swaps and Derivatives Association (ISDA) is establishing standards for derivatives trading in the financial sector. However, the computerized form of paper contracts still exists, making this task cumbersome.

Smart contracts can also be called computer programs that can automatically execute contract terms when certain conditions are met, reducing human involvement in transactions.

How Smart Contracts Work

Barclays created a smart contract for the pilot, and ISDA agreed to assign a value to the electronic document in advance, so that the documents of each bank were exactly the same, which would cause operational delays and unnecessary human intervention.

The bank can then add terms to the derivatives contract, such as the need to keep a record of changing prices; the relevant information can be seen online. Of course, the bank must first search its input information and documents to find an earlier version of the contract.

Lee Braine

Lee Braine of Barclays Investment Management, who is leading the project, said

“Assuming it’s centralized in some sense, you could imagine banks negotiating among themselves, finalizing changes to the status quo, and then storing them somewhere centrally, like on the web. That would reduce the legal documentation challenges that banks face.”

Of course, the occurrence of a transaction requires the support of a series of legal documents, which can be sent to all parties involved to sign and execute the transaction. Currently, the legal documents of each party are different, and centralized file storage allows all parties to settle transactions more quickly and at a more favorable price.

Blockchain and Smart Contracts

Blockchain is the underlying technology of Bitcoin, similar to Bitcoin's huge decentralized ledger; each transaction information is stored on the global Internet to prevent tampering. Banks believe that it can be used in foreign exchange and securities transactions to reduce costs and improve efficiency.

Blockchain has the potential to enable an immutable and secure way of recording smart contracts, which means that banks and regulators hold immutable transaction records, thus eliminating the tedious data entry and regulatory tasks for lawyers and bankers.

Each party needs to submit a contract to verify the transaction, which involves many banks and regulators. Once all parties agree on the contract, the transaction can be carried out; specifically, in the case of Barclays' pilot project, it can complete derivative transactions.

challenge

Barclays used a blockchain technology called Corda in the trial, which was developed by R3, a consortium of global banks including JPMorgan Chase and Citigroup that is dedicated to researching and developing new financial technologies. This is the first time that the Corda blockchain has been used in a public trial.

However, the development of smart contracts is still in its early stages, and the precise definition and specific operation of the technology remain a huge challenge. Regulators and standard-setting bodies in various industries need to come together to give the technology a common definition. Barclays' pilot project hopes that ISDA will become the issuer of smart contracts.

Braine said that while the blockchain uses R3’s Corda distributed ledger, the industry is open to the emergence of more blockchain technology vendors; first those vendors must collaborate on common standards.

“Interbank collaboration is needed to make blockchain technology work in this industry.”

“The industry envisions that one ledger technology will be the leading one and then enable interoperability of multiple ledgers, rather than simply being led by banks.”

There have been a number of blockchain technology testing projects over the past few years; earlier this year R3 took the lead in using blockchain technology for fixed income asset trading, while Nasdaq took the lead in developing plans to support international residents in Estonia to participate in cross-border voting at shareholder meetings.