A Barclays team has demonstrated a derivative trade using Corda, a distributed ledger platform. What challenges does Corda have to overcome before becoming the future of derivative contracts?
R3 is a consortium partnership of over 40 of the world's leading banks, working on advanced distributed ledger technologies for the global financial markets.
In early April 2016, R3 revealed the distributed ledger platform for financial services – Corda. Corda has been designed to manage financial agreements between regulated financial institutions.
Key features of Corda include no unnecessary global sharing of data, consensus between firms at the level of individual deals, enabling of regulatory / supervisory nodes, etc.
Rather than sending full, encrypted data about transactions to participants, what is shared is only confirmation that assets and cash have been exchanged.
Public demonstration of Corda
On 18 April, a Barclays team led by Dr Lee Braine demonstrated an application built on Corda. A trade for an interest rate swap was demonstrated using the platform.
The team led by Dr Lee Braine was one of the 11 teams (10 startups and a Barclays internal team) which participated in the Barclays Accelerator program in 2016. This marks the first demo of a derivative contract using blockchain technology.
In March, R3 had performed trials of fixed income assets using five distinct blockchain technologies (built by Chain, Eris Industries, Ethereum, IBM and Intel).
Development of standards is the key
The International Swap Dealers Association, which was set up in 1985, has created a standardized contract called the ISDA Master Agreement for parties which enter into derivative contracts.
Individual terms which are negotiated by the parties involved are recorded in a Schedule to the master agreement. The development of a standardized ISDA Master Agreement resulted in lowering costs and time taken for parties entering into derivative transactions.
The development of similar standards in digital contracts, especially on the Corda platform, will be the key to its success.
Given that R3 is a consortium of some of the world's leading banks, progress can be expected quickly on arriving at a consensus for these standards.
Challenge – can everything become 'smart'?
Most clauses of the ISDA master agreement are not subject to interpretation and can be implemented in smart contracts.
However, there are some clauses like Material Adverse Change (MAC) which are subject to interpretation.
When a MAC clause is invoked by one of the parties to a contract, it can still be legally challenged by the other, since the 'materiality' of an event is subjective.
Financial institutions include the MAC clause in their agreements to take care of unforeseen events. It would be interesting to see how Corda evolves and how these real life nitty gritties are taken care of.