SIMPLER OTC SMART CONTRACTS UNIVERSAL CONTRACTS

Transcription

1 SIMPLER OTC SMART CONTRACTS UNIVERSAL CONTRACTS Sofus Mortensen 3 October 2017

2 Nordea taking the lead in the Nordics in Distributed Ledger Group Efforts Architecture Working Group Only code contributor to Corda outside R3 Lab & Research Center Participating in 12 projects 67 members Legal and Regulatory Working Group Dialogue with Regulatory Authorities Nordea Group wide project exploration: - Trade Finance - Capital Markets / OTC Smart Contracts - Legal, Regulatory & Compliance 2

3 Own engagements - driven by passion for innovation Efforts Nordea s Fintech Accelerator programme European Banking Federation Participating in Blockchain Task Force Colloborating with universities blockchainschool.eu Blockchain Hackathons Exploring HyperLedger project with IBM 3

4 Agenda What is blockchain? Smart Contracts Simpler OTC Smart Contracts Idea Implementation 4

5 What is blockchain? 5

6 What is blockchain DLT? Distributed Ledger Technology 6

7 What is blockchain DLT? Distributed Ledger Technology Party A Party B Perception Perception Business Logic Business Logic Ledger Ledger 7

8 What is blockchain DLT? Distributed Ledger Technology Party A Party B Perception Perception Business Logic Business Logic Ledger Ledger 8

9 What is blockchain DLT? Distributed Ledger Technology Party A Party B Perception Perception Business Logic Business Logic Shared Distributed Ledger 9

10 What is blockchain DLT? Distributed Ledger Technology Party A Party B Perception Perception Smart Contracts Business Logic Shared Distributed Ledger 10

11 What is blockchain DLT? Distributed Ledger Technology Party A Party B Shared Perception? Smart Contracts Shared Business Logic Shared Distributed Ledger 11

12 Smart Contracts State on Ledger Example: - Ownership of asset STATE 12

13 Smart Contracts STATE Transaction STATE - Actor proposes transaction - Transaction is validated against contract by network - Upon consensus transaction is final 13

14 Smart Contracts STATE Transaction STATE Transaction STATE 14

15 Smart Contracts STATE STATE Transaction STATE STATE 15

16 Smart Contracts Levels of abstraction A concrete contract A standardized contract with specified parameters Smart contract source code (Solidity, Java/Kotlin) Smart contract bytecode (Bitcoin, Ethereum, JVM) Rigid Flexible Business IT 16

17 Simpler OTC Smart Contracts Motivation Reduce complexity of writing a new type of contract Specification Testing Making OTC Smart Contracts accessible by business Reading Reasoning Writing? Could Smart Contracts replace legal contracts? Probably not 17

18 Composing contracts Article Composing Contracts: An adventure in financial engineering by Simon Peyton Jones, Jean-Marc Eber, Julian Seward Current representation of an OTC contract A contract is represented by a contract identifier and a list of its properties Future representation: denotional semantics A contract should be represented by an accurate description of what it does Representation should be compositional from a finite, minimal set of building blocks Understanding of building blocks and ways of composition is equivalent to understanding all possible contracts. 18

19 Denotional semantics Automatic translation of contract semantics to: Smart contract code Termsheet Instructions for back office. Scheduling. Scripts for price calculations Scripts for risk calculation (market risk, CCR, CVA, xva) Legal clause (?) Interpretation instead of translation? Contract semantics become state on the ledger Underlying smart contract validates transactions 19

20 Example I-O-U High Street Bank 100 K Owes GBP ACME Corp 20

21 Example Zero coupon bond High Street Bank ACME Corp 100 K May EXERCISE Owes GBP If time > 1 June 2018 ACME Corp 21

22 Scheduling and events Example of events: Exercise of an option, can only be triggered by holder A scheduled payment Key principle: The beneficiary of an event is responsible for triggering the event. Operational liability is less complicated! 22

23 Example life cycle Issue Issue Signed by High Street Bank Issue 23

24 Example life cycle Command EXERCISE Issue Signed by High Street Bank Command EXERCISE Signed by ACME Corp Issue EXERCISE 24

25 Example life cycle Spending IOU Command EXERCISE Signed by High Street Bank EXERCISE 25

26 Example life cycle Spending IOU Command EXERCISE Signed by High Street Bank Move Signed by ACME Corp EXERCISE Move 26

27 Implementation in R3 Corda DSL 27

28 Example Zero coupon bond DSL in Kotlin arrange { actions { acmecorp.may { execute".giventhat(after( )) { highstreetbank.owes(acmecorp, 100.K, GBP) 28

29 Example Zero coupon bond DSL in Kotlin arrange { actions { (acmecorp or highstreetbank).may { execute".giventhat(after( )) { highstreetbank.owes(acmecorp, 100.K, GBP) 29

30 Example IR Caplet 30

31 Example: IR Caplet Issued contract arrange { actions { (acmecorp or highstreetbank).may { "exercise".anytime { val floating = interest(notional, "act/365", fix("libor", tradedate, Tenor("6M")), " ", " ") val fixed = interest(notional, "act/365", 0.5, " ", " ") highstreetbank.owes(acmecorp, floating - fixed, "GBP") 31

32 Example: IR Caplet Applying Fixing arrange { actions { (acmecorp or highstreetbank).may { "exercise".anytime { val floating = interest(notional, "act/365", 0.67, " ", " ") val fixed = interest(notional, "act/365", 0.5, " ", " ") highstreetbank.owes(acmecorp, floating - fixed, "GBP") 32

33 Example: IR Caplet ACME Corp chooses to exercise arrange { actions { val floating = val fixed = highstreetbank.owes(acmecorp, floating - fixed, "GBP") 33

34 Example IR Cap 34

35 Example: IR Cap Rolling out date sequence arrange { rollout(" ", " ", Frequency.SemiAnnual) { actions { (acmecorp or highstreetbank).may { "exercise".anytime { val floating = interest(notional, "act/365", fix("libor", start, Tenor("3M")), start, end) val fixed = interest(notional, "act/365", 0.5.bd, start, end) highstreetbank.gives(acmecorp, floating - fixed, "GBP") next() acmecorp.may { "skip".anytime { next() 35

36 Example: IR Cap arrange { rollout(" ", " ", Frequency.SemiAnnual) { actions { (acmecorp or highstreetbank).may { "exercise".anytime { val floating = interest(notional, "act/365", fix("libor", start, Tenor("3M")), start, end) val fixed = interest(notional, "act/365", 0.5, start, end) highstreetbank.gives(acmecorp, floating - fixed, "GBP") next() acmecorp.may { "skip".anytime { next() 36

37 Example IR Cap with limited upside arrange { rollout(" ", " ", Frequency.SemiAnnual, object { val limit = variable(150.k) ) { actions { (acmecorp or highstreetbank).may { "exercise".anytime { val floating = interest(notional, "act/365", fix("libor", start, Tenor("3M")), start, end) val fixed = interest(notional, "act/365", 0.5, start, end) val payout = min(floating fixed, vars.limit) highstreetbank.gives(acmecorp, payout, currency) next(vars.limit to vars.limit - payout) acmecorp.may { "skip".anytime { next() 37

38 Building blocks summary Overview Obligations Actions (events, scheduling) Observables, fixings Expressions, calculations Rollout of data sequences Templates State variables Conventions Holidays calendars Rolling conventions Settlement 38

39 Q & A