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 delivered by Nick Zeeb, Lead Engineer at Clearmatics, and Marc Henrard, Head of Quantitative Research at OpenGamma.
Im tech and hes 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 isnt 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. OpenGammas 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.
Ethereums 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.”