Finastra integrates post-trade blockchain for derivatives Fragmos Chain – Ledger Insights

Today Finastra announced its over-the-counter (OTC) derivatives solution Fusion Summit will integrate with 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 in early 2023.

To explore the role of the Fragmos Chain, it is worth taking a quick look at the recent UK mini-financial crisis, which was linked to derivatives. Interest rates are crucial for life insurance companies and pension funds, so they hedge against significant movements.

With the mini-crisis, there was no problem with the function of the derivatives (interest rate swaps), but the fact that interest rates changed so much after the new British chancellor made unexpected economic plans. This meant that massive collateralisation created a liquidity problem as some of the insurance companies and pension funds had to sell assets quickly to meet the calls.

So, where would Fragmos Chain fit into this scenario? It is not directly involved in the trade between two counterparties, which may be two banks or a bank and an insurance company. Instead, the record of the agreed trade, the confirmation, is verified using the blockchain. This single split record avoids trade violations where one party thought the agreement was different. And that removes the need for reconciliation.

Many derivative contracts are not static. There are changes that can again be logged by the blockchain, as are cash flows.

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), which not only standardizes data, but also processes. And Fragmos Chain uses CDM.

Fragmos Chain uses R3’s enterprise blockchain, although users can access its functionality using APIs instead of hosting a node.

This is one of many blockchain solutions aimed at the derivatives sector. DTCC is in the final stages of its DLT update to the 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 stock exchanges. Two other fintechs, Baton Systems and Symbiont, also have derivatives following trading platforms that banks use.