R3’s Rutter: swaps will trade on blockchain in five years

Risk USA: Head of industry consortium says technology will be ready next year

R3 is working with Barclays and Nomura on smart contracts

The era of blockchain technology in the derivatives markets may be closer than many think.

Distributed ledgers will form the technological foundation for trading standardised interest rate swaps within five years, according to David Rutter, founder and chief executive officer of R3, which develops distributed ledgers and smart contracts for the financial industry.

"I think [distributed ledger technology] will start making a meaningful difference in five years, and ten years from now, when we look back, the idea of someone recording a transaction behind a firewall on some ticket will look so far in the past," said Rutter.

Asked if he believes interest rate swaps trades will be handled primarily on distributed ledgers by 2021, Rutter replied: "The standard interest rate swaps, absolutely."

"Most of the work we look at is in pre-trade and post-trade," he added. "How they get transacted doesn't really matter, but how they get recorded post-trade will be on the distributed ledger."

Rutter was speaking at the Risk USA conference in New York on November 9.

Distributed ledgers first rose to prominence as the technology that underpins digital currencies, such as bitcoin.

Banks, interdealer brokers, central securities depositories and clearing houses have all been exploring the applications of the technology in recent years. The majority of suggested use cases for distributed ledgers are in pre and post-trade functions, such as know-your-customer and anti-money laundering compliance, trade settlement, reconciliations and reporting.

Distributed ledgers work with digitised versions of financial assets, called smart contracts. R3 has been working with derivatives market participants - including firms like Barclays and Normura, as well as the International Swaps and Derivatives Association - to create smart contracts for interest rate swaps.

Rutter said R3's aim was "to really define what attributes needed to be in that contract, specifically for interest rate swaps, and to look at how the legal system interacted with that if there was a problem."

He insisted it was only a matter of time before the kinks are ironed out and distributed ledgers are deployed in the financial markets.

"When I sit here today versus a year ago, this is no longer ‘if' or ‘will' this happen," he said. "I don't think there any doubt that we're going to see these distributed ledger technologies change how transactions are processed globally."

R3 plans to beginning offering viable distributed ledger products to financial firms within the next 12 months, Rutter added. "We will have product in the market in the next year, chipping away at the edges and getting those who are disbelievers to believe."