DTCC’s Credit Derivatives DLT Pilot — Some Pointers to Success

By Pete Harris, Principal, Lighthouse Partners, Inc. and WSBA Perspectives Blog Curator
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The Credit Derivatives distributed ledger pilot that DTCC is kicking off is a big deal. If it works, the DTCC will rightfully attract much kudos for its early bet on DLT. If it doesn’t work, then … well … actually, I don’t want to think about that scenario.

​Many in the financial markets reckon that 2017 will see participants move from proof-of-concepts (focused on testing some limited functionality) to early pilots (implementing a real-life application in a production environment). That’s going to be a significant step for most, not only because it will mean rounding out functionality so applications are susable, but also getting the apps (and the middleware/systems software stack that supports them) ready to run in an enterprise data center, where they will need to conform to corporate operations standards, security protocols, and be able to scale appropriately. Make no mistake, successful pilots are very important to the widespread usage of DLT.

​Getting back to the DTCC, I just wrote a lengthy article on the Trade Information Warehouse (TIW) pilot that goes beyond the press release and contains lots of good information provided by DTCC execs (thanks for your time folks). Methinks there are some takeaways from that article that provide some useful pointers for others looking to move from PoCs to pilots in the financial markets distributed ledger space. So here are some of them:

• The TIW supports a standalone business, namely Credit Default Swaps. It’s a credible business to seek to port to a distributed ledger, and it does involve interconnections to trading and clearing platforms and to trading firms, but these are completely separate from those used for markets like equities and bonds. So the pilot is focused and does not impact the majority of the DTCC’s business.
• The new TIW in its first phase will be a 1:1 functional replacement for the existing service. As such, it will not be impacted by ‘feature creep’ that can delay software projects. It also means that, probably, much of the code currently used to interface to trading platforms and firms can be reused. So less code to write and test, and less risk as existing code is proven. Furthermore, it means no immediate changes for trading firms that use the system.
• The new TIW will implement distributed ledger technology for its own use first. Essentially it will be a centralized implementation of a distributed ledger. And while that might be a bit boring for decentralization advocates, it does allow for the technology to be proven before trading firms — DTCC’s customers — are brought on board. It also means that the first phase can proceed without any dependencies on trading firms implementing it (which could cause uncontrollable delays).
• Seemingly, the DTCC worked with its trading firm users on the design process for the new TIW, and it was those firms that were keen on using a distributed ledger approach. So there should be a community spirit towards its implementation, which will help keep a positive outlook should rollout difficulties occur. Or, to be a pessimist, if it does not work out, then the DTCC has some fingers it can point at others.
• The DTCC is a fan of open source software, but open source can take a while to be developed into something that is usable in real life (in terms of performance, scalability, etc.). By going with a proprietary product from Axoni, and then requiring the vendor to open source it, the DTCC gets a premium product from day one, and can keep true to its open source vision.

So, in conclusion, exciting times are ahead this year. Hopefully more pilots will get underway among Wall Street firms that prove the utility of distributed ledgers and lead to further adoption.

As an aside, now that pilots are being progressed, it’s clear that some of the major IT vendors out there (other than IBM, which has been into blockchain for a year or more now) are getting interested in the technology — eager to supply infrastructure and integration software and services that will ease the rollout of pilots, and full blown operational systems in the future. In turn, major IT vendor involvement will encourage the less adventurous trading firms (as well as smaller ones and buyside firms) to get involved.