The Depository Trust and Clearing Corporation will complete the build of its first blockchain project, for a warehouse of credit default swaps, this autumn.
After that, it will release a white paper describing its experience and lessons for others, says Larry Thompson, New York-based vice chairman of the world’s largest clearance and settlement house.
DTCC quietly scrapped work on a second blockchain project, for repurchase agreements, which last year Thompson had suggested was getting close to passing its proof of concept.
The DTCC, after consulting industry participants and its vendor for that project, Digital Assets, decided traditional technologies remained better suited to repo. But the CDS warehouse project is on track. “We anticipated 23 sprints,” Thompson told DigFinreferring to agile-development workflows, “and we’re now at sprint 20. We should complete the major build by the end of summer, with user-acceptance testing kicking off in late 2018.”
Overall, he says the development team and management has settled into a view that blockchain is not going to upend the way the DTCC operates, but they are exploring its benefits in specific areas.
“A year ago, we feared disruption by distributed-ledger technology to clearing and settlement. Today we don’t see our tech going away.”
Early lessons
The CDS warehouse project is not just about blockchain, either:
“We’re replatforming our trade information warehouse with DLT and cloud computing, and using enterprise agile [DevOps] to build it.”
DTCC will not shutter the legacy infrastructure for the CDS warehouse, either, until the DLT is fully vetted. “We will test the systems in parallel,” he said.
Once the CDS project is done, Thompson says DTCC will share more details about the lessons it learned from the experience with its partners.
“When DLT was first developed, it wasn’t for financial services,” he said. “So it’s not fit for purpose.”
One big example: there’s no netting of trades in DLT; smart contracts are required to serve that function. Given its securities clearing business nets 95% of all trades before clearing them, netting is an invaluable aspect for efficiency and risk control. So DTCC has to build in that functionality if it is to make DLT relevant to most of its business.
“You don’t know all the problems with DLT until you try it,” Thompson said, noting other large-scale developments are mostly at the proof-of-concept stage.
DLT to cloud to cyber
DTCC, as an industry utility, is keen to see DLT developments avoid recreating the business or operational silos that are a hallmark of the finance industry. The CDS project has been led by IBM within the aegis of HyperLedger, an open-sourced governance body, along with input from vendor Axioni and R3, the bank consortium for DLT.
Digital Asset was the vendor on the kyboshed repo project.
One lesson seems to be that DLT projects don’t emerge in a tech vacuum, but in cooperation with cloud. DTCC uses AWS along with the other top three vendors in the U.S.
Right now, these uses are for non-core data, such as human resources records and emails, as well as historical transaction data that is no longer sensitive but required for reporting purposes.
The purpose of putting these on vendor clouds is to reduce the burden on DTCC’s proprietary servers as they handle other, more sensitive processing. Cloud also provides resiliency in case the DTCC’s own systems, or those of a major counterparty, should fail. And it lets users’ developers build and test systems more quickly.
But with new technologies come new risks, and cybersecurity has become a bigger focus; Thompson’s visit to Hong Kong, when he sat down with DigFin, was part of a regional tour to discuss this with Asian regulators and market operators.
