August 4, 2017

The Collision of the Law and Technology: A White Paper from ISDA on Smart Contracts and DLT

This paper – Smart Contracts and Distributed Ledger – A Legal Perspective – outlines a possible near-term application of a smart contract for derivatives, and highlights the importance of a more formal representation of certain legal clauses and actions within the ISDA Definitions to enable them to be represented and executed via smart contract code.

ISDA and LinkLaters have produced a paper which explains the challenges in turning the english language form of ISDA documentation into something which computers can store and execute. The paper explains how some wording such as "good faith" and "commercially reasonable" have no easy encoding in any language, but that many operational provisions such as those for interest and payment calculations can easily be translated.

Overall this paper is a worthwhile read as it precedes what could become an entirely new way of creating, communicating and executing contracts. The paper also points out that moving the industry in this direction will require wide cooperation to build common infrastructure as individual implementations will cause yet more integration problems. Perhaps the combination of electronic contracts, further iterations of FpML and the adoption of distributed ledgers can be likened to the Operating System and 'apps' we are all familiar with on our phones. 

  • The ISDA Operating System
    • A common data representation
    • A common operating model for processes and interactions
    • A common machine readable form of legal documentation
    • A common legal framework, in electronic form
  • The apps
    • A distributed ledger globally for all ISDA contracts
    • A bilateral distributed ledger between counterparties
    • An interest and payments calculator
    • A pricing model
    • A curve builder
    • Reference data supply
    • Electronic signatures
    • Cashflow netting
    • Data transformation (such as to SDRs, TRs)
    • Data reconciliation (will it ever go away?)
    • Exposure calculations
    • Margin calls
    • Dispute resolution
    • Central clearing?

What the future looks like may involve more cohesion between 'apps' from vendors making integration less expensive. Will this lead to zero touch STP? Let me know in the comments. Read the full paper below.


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