Smart Derivative Contract: DZ BANK and ABN AMRO execute first international transaction
DZ BANK and ABN AMRO Bank have, for the first time, traded an over-the-counter (OTC) derivative internationally using a Smart Derivative Contract (SDC) SDCs use distributed ledger technology (DLT) to store data and execute smart contracts. The ten-day- transaction was fully automated. Daily payment between DZ BANK and ABN AMRO were triggered by a mechanism, sent via Instant SEPA, and account balances were reported back to the smart contract.
With this transaction, DZ BANK is further developing the SDC concept it designed in collaboration with a foreign bank with the aim of establishing a digital protocol standard for the DLT-based settlement of OTC derivatives. “With the first international SDC transaction, we have taken a decisive step toward establishing the Smart Derivative Contract as an industry-wide standard for the digital settlement of OTC derivatives. With the SDC, we are creating a blueprint for fully digital financial instruments that generate added value – in the case of the SDC, this is the reduction of counterparty risks,” comments Matthias Bergner, Head of Treasury.
With the SDC, we are creating a blueprint for fully digital financial instruments that generate added value – in the case of the SDC, this is the reduction of counterparty risks.
Yorick Naeff, Head of Innovation at ABN AMRO: "Trading an OTC Smart Derivative Contract for the first time on an international basis demonstrates ABN AMRO's ambition to consistently integrate digital innovations into our service offering. Our ambition to offer clients a premium service in this area is at the centre of our growth ambitions throughout Europe."
The Smart Derivative Contract represents a new form of digital financial instrument: a smart contract maps the entire life cycle of a financial product – including automated market data delivery and integrated valuation methodology for the underlying interest rate derivative in this case. The SDC concept is designed to be system-independent in terms of the digital payment infrastructure used. DZ BANK is already working on adapting the Smart Derivative Contract to the internationally recognized documentation standards of the International Swaps and Derivatives Association (ISDA). Integration into existing processes and documentation is intended to enable trading with the SDC for a broader international user group.
DZ BANK has extended the concept of an algorithmic process shell for financial instruments to the securities side with the ‘Smart Bond Contract’, which digitizes and standardizes the entire life cycle of a tokenized security. Regulated DTL infrastructures such as “Regulated Layer One” (RL1) can provide a suitable basis for the widespread introduction of such smart contract-based instruments.
