ALGORAND AND ISDA CDM PROTOCOL

Doing business involves taking risks no matter how little the start is. As such, a lot of businesses suffer much financial risks they would obviously willing to eliminate, And this predisposes several solutions in the form of derivatives: one of the major area of the finance economy. The main purpose of this solution is to reduce risk to the minimum and/or avoid it at all cost.

The International Swaps and Derivatives Association (ISDA) in partnership with Algorand blockchain to create efficiency and new market opportunities for financial institutions that can be created by leveraging Algorand’s potentials for asset tokenization and programmatic money. The combined protocols will enable institutions with independent financial databases to validate the consistency and correctness of their information, while at the same time preserving privacy about the trading history and the holdings of the trade participants.


What Is Algorand?

Algorand is an American blockchain technology startup known to be global technology provider, having provided technological services to a number of digital based projects, also, dedicated to removing barriers to smooth financial running. It is a decentralized and scalable digital currency and transactions platform, powering the DeFi evolution by enabling the creation and exchange of value, building new financial tools and services, bringing assets on-chain and providing responsible privacy models.


What Is ISDA?

The International Swaps and Derivatives Association (ISDA) is a trade organization of participants in the market for over-the-counter derivatives.It is a trade organization created by the private negotiated derivatives market that represents participating parties, and helps to improve the derivatives market by identifying and reducing market risks. Its establishment was aimed at standardizing the derivatives industry, putting in place the infrastructure necessary to effectively trade and sell all forms of derivatives, also, to offer functional risk management processes that can be put into practice by entities or individuals involved in the trade trade.

Its objectives is : creating a standard, establish and oversee policies and maintain a safe space for traders and users operating within the derivatives market, not excluding giving legal definitions of terms used in contracts. FpML represents ISDA trademark, open source application, accessible by professional or entity within the ecosystem as well as the language standard for industry and widely used across the derivatives market extending to exchanging derivatives as well. Additionally, using FpML language, ISDA created a standardized contract (the ISDA Master Agreement) to enter into derivatives transactions.


A Glance At The ISDA Master Agreement

In 1992, the association developed a standardized contract called the ISDA Master Agreement for derivatives transactions.

  • The contract served an internationally agreed document published by the firm is used to provide legal and credit protection for parties who entered into over-the-counter or OTC trading. Its purpose seek to alleviate the risks associated with derivative transactions and legal risks.
  • It is typically used between a dealer and the counter party during trade deliberations. it is fundamental to thus provides a template for the derivatives market.
  • It is a netting agreement and all transactions depend on one another
  • The agreement is typed: single jurisdiction/currency and multiple jurisdiction/currency.

Derivatives

These are contracts that get their value from an underlying index, interest rate, or asset. They are used for:

  • Opening up exposure to price fluctuations, so speculation is easier
  • Insurance against price movements, and
  • Providing lines of access to assets and markets that are more difficult to trade.

Examples includes: Swaps, Futures, Forwards, Options.


OTC

Over-the-counter (OTC) derivatives are traded between two parties, not through an exchange or intermediary. They are processed through the FpML language, – an open source XML standard application.

CDM

The objectives of CDM are to drive consistency and standardization, promote golden sources of trade data, and ultimately increase efficiency and reduce costs for market participants across the trade life cycle.

The implementation of ISDA Common Domain Model (CDM) in Algorand blockchain would make it accessible for financial institutions to use existing templates and programming tools in creating financial instruments.

Likely Benefits If CDM Is Implemented on Algorand blockchain

  • The implementation of ISDA Common Domain Model (CDM) in Algorand blockchain would make it accessible for financial institutions to use existing templates and programming tools in creating financial instruments.
  • Using the Algorand blockchain as a CDM data validator
  • Algorand blockchain as a CDM data validator, it would give users access to financial tools to safely participate in blockchain based marker.
  • Integration of the model with the Algorand blockchain will greatly reduce the infrastructure complexity of the financial system, both internally for a given institution and externally for the entire system, allowing for easier communication across platforms and data-basing individual institutions.
  • Moreover, the solution may protect companies from needing to share any sensitive information with external parties or regulators besides the hash of the CDM object.
  • Lastly, the system will allow for easy reconciliation of trade information across counter-parties where institutions do not need to modify their current database system to fully enjoy the advantages of the solution.

Using Algorand Standard Asset And Smart Contract (ASC1) For CDM Management

  • Employing the use of Algorand Standard Asset and smart contract has the potential to greatly reduce the complexity of managing derivatives portfolios and other financial instruments to fully comply with the ISDA CDM policy and regulations.
  • There is likely to reduce, the cost and risk of execution with instant settlement for any transaction required by the contract if CDM-based financial derivatives is represented programmatically on the Algorand blockchain,. Financial institutions will be able to develop a set of tools to easily execute similar operations. It would encourage financial institutions to implement automated and scalable solutions for managing complex processes with speed and accuracy.
  • Algorand ASA and ASC1 can be used as a CDM code generator.
  • The ASA definition can be integrated into the CDM model to produce CDM object for storage and usage directly on the blockchain.
  • Algorand Standard Asset can be used to tokenize derivatives to embed the same contractual terms as the non-digital versions of these financial contracts.
  • Users of these assets may be enabled to create assets with well-defined CDM representation without incurring the costs of complex financial analysis and software engineering implementations which only large financial institutions can afford.

Conclusion

The essence of Algorand’s and ISDA partnership is to bring new tools and infrastructure encouraging new participants to build products in the border-less ecosystem.

Largely, Algorand is suitable for financial institutions to develop smart contracts for derivatives to complying with the said organisation (ISDA) standards, presenting existing legal constructs into executable code, allowing for increased efficiency and automation in the financial industry.


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Written By:

Adesina Oluwasanmi,
Algorand Ambassador

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