New digital standard: DZ BANK and Union Investment trade OTC derivative as smart contract

DZ BANK and Union Investment jointly traded a legally binding over-the-counter ("OTC") derivative as a smart derivative contract (SDC) and settled it fully automatically over several business days at the end of December. The underlying was an interest rate swap. The resulting payments were executed in real-time using a settlement token, a digital account management tool, via SEPA payments. A trigger solution developed by DZ BANK was used for this purpose. The SDC enables and legitimises transactions between multiple parties without the need for a central entity. In this way, conventional process costs can be reduced and risks minimised.

As early as 2021, DZ BANK, together with BayernLB and Deutsche Börse, demonstrated in an initial successful test transaction that OTC derivatives can be implemented entirely digitally. The new project has now enabled an asset manager without a central account manager to trade digital derivatives for the first time in a short period. The basis is distributed ledger technology. The self-developed software was operated decentrally on interconnected Cloud environments of the two trading partners. The transaction data of the traded derivative was thus digitised and stored in a uniform manner, and the SDC protocol was executed in a fully automated manner.

The project is open to other partners to further develop the concept as a common open standard and free infrastructure for digital derivatives.

"Smart contracts, as selfexecuting and automated contracts, make the derivatives business easier, safer and cheaper to transact. With the successful test transaction, we have shown how we can work across company boundaries to develop a common digital standard with added value for stakeholders," says Prof. Dr. Ulrich Walter, Head of Capital Markets Trading Department.

For DZ BANK as trading partner, the automated booking of settlements was carried out via an established account at VR Bank Lahn-Dill.  The information service provider Refinitiv, a London Stock Exchange Group company, provided the market data and connected to the Cloud environments for automated, real-time delivery. XVA Blockchain GmbH operated another Cloud-based valuation service to determine the daily settlement amount. The law firm Jones Day revised the contractual framework.