Today Finastra announced its over-the-counter (OTC) derivatives solution Fusion Summit will integrate with the Fragmos Chain post trade solution. The integration will be available in Finastra FusionFabrice, the company’s app store. Fragmos Chain is expected to go into production early in 2023.
To explore the role of Fragmos Chain, it’s worth taking a quick look at the recent UK mini-financial crisis, which was linked to derivatives. Interest rates are crucial to life insurers and pension funds, so they hedge against significant movements.
With the mini crisis, there wasn’t a problem with the functioning of the derivatives (interest rate swaps), but the fact that interest rates moved so substantially after the new UK Chancellor made unexpected economic plans. That meant massive collateral calls created a liquidity issue because some of the insurers and pension funds had to sell assets quickly to meet the calls.
So, where would Fragmos Chain fit in this scenario? It’s not involved directly in the trade between two counterparties which might be two banks or a bank and an insurer. Instead, the record of the agreed trade, the confirmation, is verified using blockchain. This single shared record avoids trade breaks where one party thought the agreement was different. And it removes the need for reconciliation.
Many derivatives contracts are not static. There are amendments, which again can be logged by the blockchain, as are cashflows.
So in a mini crisis, each counterparty can clearly see the status of all their derivatives logged on the blockchain.
The derivatives association ISDA created a standard, the Common Domain Model (CDM), that doesn’t just standardize data but also processes. And Fragmos Chain uses the CDM.
Fragmos Chain uses R3’s enterprise blockchain, although users can access the functionality using APIs rather than hosting a node.
This is one of many blockchain solutions targeting the derivatives sector. The DTCC is in the final stages of its DLT update to its Trade Information Warehouse, the post rade solution for credit derivatives that processes more than $10 trillion annually. It was developed by Axoni, which has another blockchain offering for equity swaps. Two other fintechs, Baton Systems and Symbiont also have derivatives post trade platforms that banks use.
