DerivHack 2018

Last month members of blk.io participated in the inaugural Derivhack 2018 Hackathon, sponsored by ISDA, Barclays, Deloitte and Thompson Reuters at Rise London.

The blk.io team receiving their prizes from Jeremy Wilson and Lee Braine of Barclays

We won the category of best solution architecture for our work built on top of our very own Epirus platform. It was great to get the recognition, especially as we were the only team building on the Ethereum blockchain (almost everyone else was building on Corda).

Pitching our platform

The Hackathon

The purpose of the event was to find more effective ways to process derivatives taking advantage of ISDA’s Common Domain Model and distributed ledger technology. 

We at blk.io believe that the OTC markets can benefit hugely from blockchain/distributed ledger technology, which is why we were really excited about this hackathon.

Hacking away

For those of you who don’t know what on earth I’m talking about, a brief primer follows.

A Primer on the OTC markets

When someone buys or sells a share in a company (for example Barclays), this is done via a stock exchange such as the London Stock Exchange. Like any marketplace, the exchange brings together buyers and sellers, who will be buying or selling a certain quantity of a stock for a set price. 

The is fine when you have a well understood, standardised product, with a small number of attributes to describe it, such as a stock; but sometimes there’s a need for more complex products that you can’t go to an established exchange to buy or sell them due to their requirements — i.e. they serve a specific niche in the market. Hence you can go directly to another bank or financial institution who understands the specifics and you create a more bespoke product that has a lot more detail about the trade terms between the participants. 

All of these bespoke agreements between financial participants make up the over the counter (OTC) derivatives market. You may well have heard this market mentioned in the context of the financial crisis — mortgage backed securities (MBS) and collateralised debt obligations (CDO) are types of OTC derivative. More commonly you hear about interest rate swaps (IRS), which enable someone who has a fixed rate loan to swap it with someone else for a floating rate, as they want to lock in an interest rate, much like a homeowner may with their mortgage. Additionally, you have credit default swaps, which in effect act as insurance against someone who takes out a loan being unable to repay it. 

These products serve a useful purpose for business who want to limit their financial risk. However, one of the key changes that were enacted as a result of the financial crisis was to provide greater transparency.

ISDA

Enter ISDA, who are the standards body for the OTC market, and drive a number of initiatives to reduce risk, increase transparency and improve operational infrastructure.

One of the ways they do this is with the financial product markup language (FpML). FpML is an XML based schema for describing OTC products. It’s been around for years and is used throughout industry for post-trade lifecycle events, including reporting details of trades to regulators.

Organisation of the FpML Standard (“FpML Specification”) 

http://www.fpml.org/docs/FpML5-at-a-glance.pdf

Last year ISDA announced the Common Domain Model (CDM) which is modelled on how derivatives are traded and managed throughout the trade lifecycle. The intention of the CDM is that participants following it will all produce the same outcome, helping to standardise the data produced by participants.

High-level CDM Concept

This notion of standardised data plays very well with smart contracts and DLT, which is why there is significant interest in the space.

Our solution

The focus of the hackathon was on working with a version of the CDM to process specific trade lifecycle events and explore DLT. Using our Epirus platform, which uses Quorum for its underlying blockchain, we created a solution that ingested the trade data then created an Ethereum smart contract representation of the underlying trades.

Simplified solution architecture

Out network configuration was as per the below, where there were a number of nodes representing participants on a trade such as a bank, with the addition of a regulator node who was privy to all transactions.

Our network deployment

By utilising the privacy features of Quorum, alongside Ethereum smart contracts, we were able to provide:

• Privacy of transactions between participants, without excluding regulators
• The tracking of trade lineage (history) along with event hashes that correspond directly to the real underlying trades
• Enforce trade contract state logic facilitating a single source of truth among participants

Trade contracts were browsable in our Blockchain Explorer

We also hooked into Thompson Reuters’ BlockOneIQ service to get historical interest rate data for applying payments to a number of the trades.

It was really exciting for us to get our hands dirty with the CDM, and we look forward to continuing to use standards backed Ethereum open-source technology, to help move the derivatives market forwards with distributed ledger technology.

To learn more about our Epirus Platform, and how it solves the challenges with running and managing your own blockchain platform, please contact us to find out more!

Shout-outs

Frances and Helen for the awesome work organising the event, and Tony for getting everyone fired up at the start!

Also thanks to Wojtek for his help with BlockOneIQ, and finally Luke MacGregor for the fantastic photos documenting the event.