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The Basic Derivative Trade Lifecycle



The blockchain, as known as Distributed Ledger Technology (DLT), can revolutionise the derivative markets, ranging from transforming the trade lifecycle to tokenising the underlying assets. In whatever way DLT is adopted, it ensures an immutable, transparent, tamper-proof record of the transaction. Regardless of the underlying asset class, the majority of financial derivatives follow the 7-stage basic trade lifecycle shown below:



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The Alternative Derivative Trade Lifecycle using DLT&nbsp;



With the use of DLT, the number of stages in the lifecycle can be reduced, even if a new stage is added: the much-wanted Digital Regulatory Reporting (DRR).&nbsp;



The five stages of an alternative derivative trade lifecycle using DLT are:



<figure class="wp-block-image size-full"><img decoding="async" loading="lazy" width="601" height="525" src="https://cms.vaionex.com/tokenovate/wp-content/uploads/2023/03/Alt-tradelifecycle.png" alt="" class="wp-image-948"/></figure>



<ol>
<li>Trade Execution: Buyers and Sellers can directly trade on the blockchain without the need for intermediaries. The agreed trade details that are traditionally summarised in a ‘Term Sheet’ are recorded directly on the Ledger. The sales, trade execution, trade capture, trade enrichment can all be combined into a single step eliminating the need of various post trade steps taken to mitigate risk by Middle Office and Operations teams.&nbsp;&nbsp;</li>
</ol>



<ol start="2">
<li>Smart Contracts: At present derivative trades between parties are typically confirmed by the parties to a trade drafting and signing a ISDA confirmation for the trade. These short form contracts are drafted by Legal or Operations teams, and are an additional cost to internal cost centres. DLT allows the contractual trade details, agreed at the time of execution, to be encoded directly into a smart contract. Smart contracts are self-executing programs which will automatically enforce the agreed terms.</li>
</ol>



<ol start="3">
<li>Trade Settlement: Trade settlement involves the transfer of funds or assets during the lifecycle of a trade on predetermined dates until the trade is early terminated or matures. Fund transfers can be made directly to the participant party accounts or to custodians appointed by them. In addition, if the trade requires the delivery of an underlying asset such as shares or gold, it is simply possible to transfer the ownership of the asset on the blockchain instead of a physical delivery or the need of an intermediary custodian.</li>
</ol>



<ol start="4">
<li>Trade Clearing: If trade clearing is applicable for the trade type, typically for exchange trades, trades must be cleared &#8211; validated, verified and settled through a Central Counterparty. Trade details can be directly verified by the Ledger or the smart contract.</li>
</ol>



<ol start="5">
<li>Digital Regulatory Reporting: An additional feature which DLT allows is for the digital reporting of trade data for regulatory purposes. Most financial counterparties who are subject to regulatory reporting under derivative trading obligations must provide trade details on their positions to their local financial authority. At present, often due to internal systems being archaic and regulatory regimes being imposed relatively recently, firms have needed to create new work-arounds and processes to manage and sort the voluminous data they are legally obliged to send and then further reconcile their submissions to the repository. DLT allows for the automation of financial data reporting in a standardisation format for the purposes of validation and reconciliation directly from the blockchain. Most regulatory authorities are encouraging the markets to move towards digital reporting to ensure accuracy, efficiency and real time reporting e.g. CFTC.</li>
</ol>



To conclude, by embracing DLT the financial market can simplify the derivative trade lifecycle and introduce more resilient and transparent reporting. A win for everyone involved!

The Blockchain and Derivatives: Building A More Powerful Trade Lifecycle

Derivatives trading has been around a very long time. In the last few decades however, the scope and scale of derivatives trading has increased considerably. With such significant growth comes more complex operating models. To date, the infrastructure supporting the market has served its purpose well.



In the last few years we have also seen the rapid adoption of new technologies having a material impact on how the world operates. Individual and isolated approaches by firms to solve increasing complexity in the pre-trade, trade execution and post-trade lifecycle have led to challenging business and operational contexts for market participants and their representatives, infrastructure providers as well as regulators. It doesn’t have to be this way.&nbsp;



Standardisation can take many forms. And standards can be different depending on where in the world you are. At its core, however, standards should support &#8211; not stop &#8211; progress.&nbsp;



There are of course challenges in establishing standards; competing interests fight for preference and inclusion. But if agreed, standards bring long term benefits: greater operational efficiency, consistent regulatory compliance, increased quality and transparency of data. Clear rules of engagement simplifies participation and drives more attractive incentives. ISDA recognised this early, and has been at the forefront of driving standardisation of derivatives trading.&nbsp;



So what should be standardised in derivatives trading? ISDA themselves points out three key areas:



<ol>
<li>Standardisation of data facilitates easy integration and interoperability.&nbsp;</li>



<li>Standardisation of documents encapsulates how relationships are captured.&nbsp;</li>



<li>Standardisation of process simplifies the overall operational model.&nbsp;</li>
</ol>



For Tokenovate, standardisation of ISDA-based derivative products enables us to intelligently develop and operate our distributed financial market infrastructure and programmatic lifecycle event management software. The adoption of new technology, including the power of the cloud and the immutability of the blockchain, allows us to deliver fair and efficient solutions to our partners and customers. With standards in place, we are able to predict different scenarios more accurately, and we can collaborate more efficiently.&nbsp; Through standardisation everyone is engaged. And everyone evolves.&nbsp;



Read more:



<a href="https://www.isda.org/">https://www.isda.org/</a>

The Standardisation of Derivatives

Hello, and welcome to the Tokenovate blog. We are a UK-based software company active in the financial services market. We provide distributed financial market infrastructure, enabling programmatic lifecycle event management of the pre-trade to post-trade workflow for OTC and Exchange traded derivatives. Our vision is to operate at the heart of the next generation distributed market financial infrastructure by pioneering the adoption of programmatic lifecycle event management for derivative trading. 



But how did we end up here?



It all started a long time ago… Almost 20 years ago in fact when our co-founders Richard and Gerard worked together in the telecoms market. Even though they eventually pursued different professional paths, they always remained in touch.&nbsp;



In 2010, Richard created ClearTrade Exchange, a regulated futures market offering a global electronic market platform for commodities. In 2016, ClearTrade was acquired by European Energy Exchange AG, a Deutsche Börse Group Company, and Richard ventured out into new adventures. But he never completely lost touch with the derivatives market. 



At the same time, Gerard was running his own business, being operationally responsible for multi-billion pound projects across multiple markets, including Royal Bank of Scotland, HMRC, Vodafone, BP (to name just a few).&nbsp;&nbsp;



For the last few years, ISDA has embarked on an ambitious project to standardise, digitise and automate how derivatives are traded and managed across the trade lifecycle. The ISDA Common Domain Model was born.&nbsp;



Simultaneously, Blockchain technology has travelled on a remarkable journey, enabling an impressive development of innovative new solutions suitable for the financial market.



So when Richard and Gerard came together again in 2021, they realised that these two parallel developments had opened up an opportunity to solve a problem they both felt passionate about: to improve operational efficiency for the derivatives market. The idea behind Tokenovate was born.



Over the course of the next months (and years hopefully!) we will cover a wide variety of topics in this blog that hopefully will help you understand what we are doing, what exciting opportunities and developments are taking place in our market, and perhaps also one or two surprises. Thank you for reading!

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