Guest post by Chris Rivers, CEO, Optimis
How does a company providing DLT-based services to post-trade capital markets rate DAML—Digital Asset’s smart contract modeling language—in helping them resolve inefficiencies in these markets? In this installment of our ongoing series of guest blog posts by our partners, customers, and others working with the DAML SDK, Optimis’ CEO Chris Rivers discusses how DAML is helping them bring their Bloqbook solution to market.
Capital markets are more efficient when securities transactions and information technology reduce costs, risk and capital consumption. And although market dislocations and volatility have shown the need for transparency into obligations, ownership, and risk management practices, the securities issuance and risk-transfer markets are unjustifiably distributed—inducing excess cost, risk and complexity. What’s more, current methods for managing transaction data are complex and heavily dependent on fragmented systems and data architectures.
To address these long-standing issues, Optimis, founded in 2017, is building the Bloqbook solution. It addresses two key aspects: firstly, the structured rate securities that are issued and managed on Distributed Ledger Technology (“DLT”); and secondly, the automation of securities servicing, such as bookrunning, auctioning, issuance, and asset servicing. As a DLT platform for the post-trade capital market, Optimis is developing innovative financial products and services to address the inefficiencies in the securities issuance and risk-transfer markets.
Our Journey with DAML
As we traversed the landscape of potential DLT platforms, we determined that most platforms were a sub-optimal fit for capital markets given their lack of privacy and confidentiality. Initially, Optimis selected Hyperledger Fabric for their established financial services use cases and programming language agnosticism. But what started out as a perk quickly turned out to be a drawback because of the platform’s ambiguity in establishing an effective and robust governance framework for post-trade processing. This was further complicated by the notion of using a preferred language—where a developer can use a language of choice to design smart contracts—resulting in a DLT design underpinned by a language, which was created out of context for streamlining post-trade processes.
In contrast to that, DAML was purpose-built for distributed ledgers and designed to enable the exact modeling of business reasoning. The switch to DAML has allowed us significant gains in modeling our products on DLT as well as getting them to market testing much sooner.
Take, for example, Optimis’ structured rate security. This is a tokenized debt instrument having a weighted-average coupon comprised of fixed and floating interest rates. In addition, the tokenized security has the optionality to adjust the weighted exposures between these interest rates through maturity. These securities enable an issuer to lock-in interest rate exposure at issuance, with optionality to adjust interest rate exposure throughout the life of the security. In this instance, issuance of structured rate securities could enable new approaches to issuing debt securities and hedging risk exposure.
The following formed the building blocks of benefits for using DAML to develop the structured rate security:
Multi-party workflows—At the center of multi-party financial workflows is the exchange of value—but the speed at which this occurs hinges largely upon the integrity of financial transaction data. DAML ensures the mutual obligations and rights of issuers and investors are explicitly assented to, and are enforceable by law rather than software defining the law. This single, verifiable source of truth implies that the data that results from transactions can be used for further analysis without requiring expensive and time-consuming data cleansing and reconciliation.
Sub-transaction privacy—DAML preserves confidentiality by only sharing contract details to those affected by it, and does not need the entire trail of data and transactions to be carried around for validations. This allows for a much higher level of sub-transaction privacy; we do not think this is easily done in other platforms and smart contract languages.
Shared data formats—Optimis Bloqbook is being developed to enable participants to atomically transact across markets without sacrificing confidentiality of sensitive information. This sort of interoperability is enabled by the way DAML maintains and enforces smart contracts, where it is easy to designate atomic transactions (all or nothing) in a flexible manner. DAML business logic manages changes to data and shares interpretation of instructions. In addition, the ability to execute multi-party agreements and the ability to easily design-in delegation of rights were key factors in our multi-party model.
Superior by design—A key design challenge was precisely—and concisely—expressing the novel properties of structured rate securities. Given that five of six possible types of securities have three adjustment factors, the possible actions on each of the possible security/factor combinations would result in a plethora of contract templates. DAML enables the implementation of one security template, which keeps track of both type and factor, making the maintenance of the data model and process manageable.
Ease of use—As a domain-specific language, DAML was much easier to grasp due to its simpler syntax—enabling our developers to focus more on getting the business logic right and less about lower-level machine constructs. In fact, the entire DAML layer including the issuance lifecycle was conceptualized and completed in about 80% less time that we had forecasted when not using DAML.
More About the Structured Rate Security
Although a bespoke product, standardized structures for adjusting interest rate exposures of these digital asset securities are stylized:
This type of innovation will make clearing derivative contracts (such as interest rate swaps and futures) unnecessary for risk management purposes. Not only do issuers determine the timing, magnitude, and velocity of adjustments, but they also eliminate the collateral and capital costs, counterparty credit risk, and necessity of financial intermediation.
Efficient Processing Capabilities—The entire lifecycle of structured rate securities is serviced with a set of smart contracts created using DAML. Smart contracts facilitate account updates automatically and limit errors in processing transactions and loss or corruption of client data.
Examples of the types of asset servicing could be: transmitting securities registration documentation and payment remittance to the Securities and Exchange Commission for bond offering; collecting and allocating investor bids; collecting income from issuer’s cash account to credit automatically calculated coupons at their due date; and withholding or reclaiming tax.
While certain aspects of the broker-dealer and custodian roles are automated, broker-dealers will continue to market and facilitate the sale of these digital asset securities, and the custodian would ensure the operations of automated securities servicing are performed correctly.
Why Digital Asset and DAML for This Solution?
Since 2017, Optimis have set out to harness the power of DLT for the post-trade market. Optimis needed a DLT platform with the same technical standards and enforceability of the rule of law as is currently found within the capital markets. As a result, in order to drive mass adoption across multiple markets and asset classes, it is fitting for Optimis to build using DAML given the benefits that have been outlined before. The DAML SDK allowed our developers tremendous gains in productivity because they could write the smart contracts and immediately test them using the built-in browser-based navigator. Digital Asset also complements our expertise with deep industry knowledge.
Distributed Ledger Technology for the post-trade capital market will revolutionize how market participants interact with one another. The market structure will benefit from greater speed and transparency into reconciliation, a streamlined post-trade value chain and more efficient use of collateral and regulatory capital, thereby accelerating asset transfer, enhancing liquidity and increasing risk control.
Further, using DAML to develop Optimis Bloqbook yields these additional benefits:
- Purpose-built to streamline end-to-end issuance to asset servicing lifecycle built using DAML frameworks
- Reducing $30 billion annually for interest rate derivatives
- Reduce the $159 billion of capital bound to collateral and capital requirements
- Lower the $1.8 trillion in counterparty credit risk exposure
- Efficiency gains from advanced smart contract tools for asset servicing
Leveraging DAML to develop Bloqbook will create safer, more reliable and more efficient post-trade processes in the capital markets. Optimis will bring about a better ecosystem by reducing friction of information sharing and risk-transfer between parties and heightening collateral fluidity.
Join the community and download the DAML SDK at daml.com
This story was originally published 15 March 2019 on Medium
About the Author
Chris Rivers, CEO, Optimis
Chris Rivers is the CEO of Optimis, a leading innovator of financial products and developer of electronic marketplaces and analytics for capital markets. Prior to founding Optimis, Rivers held roles in fixed income investments and portfolio management at a global asset management firm, mergers and acquisitions at a boutique investment bank and mortgage banking at a global financial institution.