Overcoming the limitations of Distributed Ledgers with Distributed Automation
On Friday, 22 April Clearmatics and OpenGamma demonstrated a proof-of-concept showing how two counterparts can collectively value in real-time a portfolio of FX swaps using blockchain technology adapted from the Ethereum codebase. The demonstration was performed at the QuanTech conference (www.quantechconference.com), which took place in Canary Wharf, London on the 21st and 22nd.
The demonstration was delivered by Nick Zeeb, Lead Engineer at Clearmatics, and Marc Henrard, Head of Quantitative Research at OpenGamma.
“I’m tech and he’s quant, so together we are quantech”, Zeeb joked at the beginning of the presentation, referring to how he and his co-presenter embodied the spirit of the QuanTech conference, the first conference of its kind in bringing together both experts in quantitative finance and experts in distributed technology.
The demo showed a real-time valuation a portfolio of over-the-counter FX swaps between two counterparts using a distributed virtual machine, which allows both counterparts to act as calculation agent and come to agreement on portfolio valuations in real time, eliminating valuation disputes, which are common in over-the-counter, bilateral derivatives markets.
There is much talk in the industry today about Distributed Ledger Technology (DLT), but Clearmatics prefers to describe the technology that they are developing as Distributed Automation Technology (DAT). The system demonstrated at the QuanTech conference does contain a series of distributed ledgers that record reference data, deal data, and market data, but the key innovation is the use of a distributed virtual machine to compute business logic and financial models. Robert Sams, Founder and CEO of Clearmatics explains:
“Distributed ledger technology emphasises shared and replicated data storage, but some very specific and rigorous business logic must govern how those ledgers are amended. If the automation of that logic isn’t also distributed, then DLT will actually encourage more centralisation in post-trade intermediation and do little to increase transparency.”
Distributed Automation Technology emphasises shared and replicated business logic as well as ledgers, which will allow for “automation without intermediation”. Currently, post-trade automation is implemented by siloed post-trade technology services.
The collaboration between Clearmatics and OpenGamma was driven by the need to incorporate into the distributed virtual machine an industry-grade reference library of financial analytics. OpenGamma’s Strata library is widely used by a diverse group of industry participants, including clearing houses, banks and hedge funds. Both companies are also committed to open source software, which many industry participants and regulators believe is a crucial input to the goals of creating robust, secure and transparent post-trade infrastructure.
Illustrating yet another virtue of open source technology, the virtual machine technology used in the Clearmatics-OpenGamma demo was based on a modified version of Ethereum, a project that is both a public blockchain and an open source development project. Clearmatics uses a different consensus framework from the Ethereum blockchain, sometimes referred to as “permissioned” networks because the validators are known, authenticated and legally accountable members of a consortium network.
After the event, Vitalik Buterin, Creator of Ethereum said:
“We are excited to see groups such as Clearmatics and OpenGamma developing and testing Ethereum-based applications in an institutional financial setting.
Ethereum’s greatest strength is its flexibility; whether you are interested in financial applications, identity or supply chain tracking, permissionless chains or permissioned, big or small, it is our goal to be able to fit the needs of many diverse blockchain use cases, and we hope to see the developer communities of these applications benefit from building common infrastructure and learning from each other.”
After the event, Mas Nakachi, CEO OpenGamma said:
“We love working with firms like Clearmatics who share our vision for a transparent, decentralized, open source market structure. We will continue to push the boundaries at the intersection of open source analytics, DLT / DAT, and market structure to help solve some of the FICC industry’s most intractable problems.”
After the event, Robert Sams, Founder and CEO of Clearmatics said:
“The OpenGamma team are brilliant and collaboration with them is great fun. But this was also a demonstration of a very serious thesis: integrating open source financial analytics and distributed consensus technology to bring transparency and automation to an opaque and fragmented OTC derivatives market. We want to transform this industry.”
After the event, Nick Zeeb, Lead Engineer at Clearmatics said:
“It is often the integrators of new technologies that unleash most of the value. Today we unveiled the power of an open-source quant library running inside a consensus computer, demonstrating that powerful financial analytics can be performed on a distributed basis.”
After the event, Marc Henrard, Head of Quantitative Research at OpenGamma said:
“We have always believed that high quality, open source analytics, has the potential to transform our industry and this integration with the Clearmatics consensus computer is just another example of its truly transformative nature. We look forward to working with Clearmatics on integrating more models going forward, including more complex margin models associated with both centrally cleared and bilateral derivatives transactions.”
About Clearmatics and OpenGamma
Clearmatics works with consortia of financial intuitions to build Decentralised Clearing Net- works that implement post-trade processes on a bilateral and multilateral basis. It is focused on Fixed Income, Currency and Commodities asset classes and their OTC derivatives.
OpenGamma is the analytics company dedicated to reducing the costs of trading derivatives, by providing actionable recommendations to front-office, risk and treasury. Our deep quantitative understanding of CCP margin and capital models, coupled with our cutting-edge cloud-based technologies, give derivatives users the ability to uncover hidden opportunities that enhance returns.
Since our founding in 2009, OpenGamma has built a global client base consisting of the world’s leading financial institutions and companies across clearing houses, banks and buy-side firms. With thousands of users depending on our derivatives analytics everyday, OpenGamma helps firms tackle the biggest issues in derivatives trading.