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DTCC moving credit default swaps to blockchain by Q1'19

? Depository Trust & Clearing Corp. is planning to migrate its credit default swaps business onto the blockchain by Q1'19, according to its chief technology architect

? DTCC is among the companies that stand to gain the most from blockchain technology

? This is not the first technological revolution DTCC has weathered, and it is ready to adjust again, the executive said

The user-owned and -governed DTCC runs the centralized clearing system that underpins much of the financial industry. A decentralized system, such as the distributed ledger technology behind the blockchain, could pose a threat to DTCC — unless the clearinghouse adopts and integrates the technology. If moving credit default swaps to the blockchain goes well, other swap assets may follow, Chief Technology Architect Robert Palatnick said.

Palatnick sat down with S&P Global Market Intelligence in New York to speak about DTCC's work with distributed ledger technology. Below is an edited transcript of that conversation.

SNL Image
DTCC Chief Technology Architect
Robert Palatnick

Source: DTCC

S&P Global Market Intelligence: Could DTCC become obsolete if it does not explore distributed ledger technology?

Robert Palatnick: It's hard to move [the legacy world] forward in any technology revolution.

Before there was [depository trust and clearing], there were physical certificates moving around. DTCC did digitize things a long time ago, in the early '70s. It went from manually handling upwards of 50 million physical movements a year, to processing now 100 million transactions a day.

The evolution of the different technology platforms is not new to DTCC. We've gone through that every decade or so in moving to the next platform.

Where is DTCC in the process of testing this new technology?

We expect to complete the basic development by the end of this quarter and to start moving into user acceptance in the second half of the year. We are planning a go-live in the first quarter of 2019.

A lot of the current work is this big migration effort. You can't flick a switch and magically the old appears in the new. We've had over 10 years of old [transactions]. Those have a history, and sometimes they have predecessor trades. You've got to make sure all of those existing trades are moved over. The issue of dealing with a mainframe system moving to distributed ledger technology is a big challenge.

Figuring out what that model is going to be, testing that, figuring out how long it's going to take to transition that data — those are all the steps we're going through. Those are the kind of steps that indicate we are in late-phase development, moving towards the end of the development cycle and into the testing cycle.

Are you starting with a subset of your company?

The trade warehouse, the credit default swaps, is one of our smaller businesses.

What is also unique about the trade warehouse is that it was built over 10 years ago and mandated as the golden source centralized ledger copy for the [over-the-counter] credit default swaps industry. You also have the benefit that this is the one place [where these transactions are].

Does DTCC plan to transition every part of its business onto the blockchain?

There are three angles to that plan. First, within the derivatives swaps asset class, we're starting with the credit default swap system. If that is successful, we are going to look to expand that to other asset classes within the swaps market. There are over half a dozen other swap asset classes, so there are many different classes we're going to look to support.

We're also looking at our core processing, some of what we do in fixed income [and] in our equity model, and looking at opportunities to move that to distributed ledger. And we're also working with technology. A lot of the vendors have brand new models about how this technology should work.

It's very early to pick the winner.

Who knows what the right ledger model is going to be? It's probably going to be a world of multiple interconnecting ledgers. Envisioning what that long game is going to come out looking like is a bit of a dart throw right now, and I'm not that good at darts. [Laughs].

The goal is not to sit on the sidelines and watch the world go by, but to help lead and drive what the right model should be.

Is taking a leading role particularly important for DTCC because a decentralized system could pose dramatic changes to operations?

Absolutely. [Look at] us as a proxy for the financial industry. Even if you look at the public cryptocurrency or blockchain markets, there are new middlemen. There will always be some aspect of value-add. The interesting thing that this technology does is if you were just providing a connection, that's not needed.

Our function as an industry-owned utility is risk management and governance. That's our value add.

The value-add propositions will change because the tools will simplify and automate much of what used to be specialized. That's what the internet did with a lot of industries.

How much has this technology matured?

Almost every technology from the moment it's conceived to the point it becomes mature enough to be used [and] really starts getting expanded use, it's almost always this 15- to 20-year curve.

If you generously take the start of this era as 2008, when [bitcoin creator Satoshi Nakamoto] wrote his paper, it's 10 years old. That means we're a good chunk of the way towards maturity. It means we're probably on the 2023 to 2028 [timeline], where this really starts angling up in usage.

If you plot out what's going on in the ecosystem, we're right where we should be in the maturity of a technology.