Eleven firms working on a pilot project to manage equity swap transactions and related post-trade lifecycle events have completed the second phase of peer-to-peer blockchain infrastructure for equity swaps processing.

The implementation employs blockchain smart contracts and uses an optimized data structure in a distributed, peer-to-peer network to ensure perpetual reconciliation. The second phase of the pilot expanded the blockchain network to process equity swap lifecycle events, end-to-end, after an initial proof of concept.

'Equity swap data is infamously complex and difficult to manage, making it a terrific fit for distributed ledger technology,' said Greg Schvey, CEO of Axoni, the firm managing the project which was executed on its AxCore distributed ledger software.

As part of the initiative, Axoni, assisted by Isda, used participating firm's confirmation templates to create a standardized equity swap confirmation and trade template based on a 2011 Isda Equity Derivatives Definitions framework designed to facilitate electronic processing of equity derivatives by using standardised templates.

The participants also collaborated on a governance framework that can be used to oversee and manage a production network. The governance framework was tailored to networks with distributed infrastructure in order to create an opportunity for increased agility, cost efficiencies, and transparency.

The participant group included seven swap market participants from both the sell-side and buy-side including BNP Paribas, Citi, Credit Suisse, Canada Pension Plan Investment Board, Goldman Sachs, JP Morgan as well as service providers IHS Markit and Thomson Reuters. Isda provided equity derivatives documentation expertise and Capco provided consulting services.

By having both sides of a swap transaction on the same ledger allows counterparties can now simultaneously view and share data during the entire lifecycle of the swap - from proposal to termination.

This synchronization of data, increased transparency of calculation logic, and automation of corporate actions processing will reduce operational costs and errors and allow real-time data access for both client and regulatory reporting. 'Fewer valuation disputes, less reconciliation and real-time access to data would benefit all of the industry,' said Adam Herrmann, global head of prime finance at Citi,

Over the course of the pilot, the project tested automated lifecycle management and synchronization of single stock and portfolio total return swaps, as well as critical components regarding the deployment and management of the distributed ledger network.

The testing conducted included a set of over 70 structured test cases to assess lifecycle functionality and integration with external systems, including IHS Markit's SwapOne platform. Connectivity to SwapOne was deployed as an option to manage post-trade calculations, including accruals, resets, and payment schedules.

Key functionality tested which achieved a 100% success rate across all tests included trade creation, position building, amendments, novation, termination, swap aging, stock splits and dividends, reporting, and private key management. In addition, a diverse set of non-functional tests were also conducted to assess the strength of Axoni's blockchain infrastructure. These tests covered privacy, security, network health monitoring, node management, and network performance - with real-world throughput volumes also successfully processed by the network.

Thomson Reuters pricing and reference data was also integrated with the Axoni solution to provide market data, including equity prices, FX rates, benchmark rates, and corporate actions directly on the blockchain to enable the smart contracts' automated workflows.

Blockchain tech has been identified by the structured products industry as a way to enable automatic reconciliation of transfers, as well as automation of transactions, and payment of coupons. Blockchain technology can also be used to securitise an asset in the form of a blockchain token, which would enable traders in different locations to list assets that are easy to transfer and impossible to forge, optimising specification and authentication processes.

In a recent interview, Sohail Raja, head of execution platforms at Societe Generale corporate and investment banking (CIB), said that the bank can generate products or product ideas that can be forwarded to its clients in an on-demand basis. The French bank is focusing on post-trade functionalities initially, with an emphasis on event management, standardization of product data and process, which will help to generate products or product ideas that can be forwarded to clients in an on-demand basis.

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