DZ BANK completes third pilot transaction with Smart Derivative Contract – Volksbank fund participates for the first time

DZ BANK has completed a third pilot transaction involving a Smart Derivative Contract (SDC) with Union Investment. This is the first time that a Volksbank has directly instructed a portfolio manager to use an SDC to hedge the interest rate risk of its fund portfolio. The aim is to achieve cost advantages over conventional OTC derivatives. With this step, the central institution of the cooperative banks is consolidating its position as a pioneer in the field of digital product innovations.

The Smart Derivative Contract is a digital over-the-counter (OTC) derivative that minimizes contract and counterparty risks. DZ BANK implements the SDC as a smart contract based on distributed ledger technology (DLT). This enables a rule-based settlement process that the contracting parties use on a distributed infrastructure, eliminating the need for a central intermediary. DZ BANK completed this process for the first time in 2021 in cooperation with BayernLB. The next milestone followed in 2022 with Union Investment, where settlements were carried out in real time and fully automated for the first time.

In fall 2024, DZ BANK test-ran the settlement of an SDC using the Bundesbank's trigger solution under real market conditions as part of the ECB's exploration phase for digital central bank money. DZ BANK was the first institution to operate its own node in the Bundesbank's DLT network and to demonstrate the possibility of automated settlement of derivatives in digital central bank money.

With this third transaction, DZ BANK is underscoring its ambition to continuously expand the product and develop digital solutions on a partnership basis. The legal (OTC) framework was significantly revised to establish a contractual standard for digital derivatives. DZ BANK processes transactions automatically using its in-house trigger solution for instant SEPA payments, which is structurally similar to the Bundesbank's solution.