Before the 2008 financial crisis, OTC derivates were used for both risk management and speculating on the markets.
After the crisis, which was to a large extent driven by credit risk, several things happened. The first was that “Systemic Credit Breaks” were added to the financial system in the form of centralized clearing houses to stop another Lehman type default contaminating the financial system. The second was the cost of margining any secured trade not cleared became much more expensive due to the adoption of ISDA SIMM.
These two ‘solutions’ have solved some problems, but created new issues that cannot be ignored, namely
The SDC is a solution to both these issues. It facilitates de-clearing and is a much cheaper alternative to ISDA SIMM Bilateral margining.
Blockchain technology has some key characteristics that qualify it as the logical and natural choice when re-thinking financial applications.
Apart from improved security, transparency, stability and reliability for all involved parties as outlined above, the application of blockchain technology greatly improves on operational efficiency by increasing speed and decreasing cost of financial services. Thanks to full digitalization and central availability of key data points within the blockchain, turnaround time of service offerings is much quicker than in traditional set-ups. At the same time operational workflow investments decrease considerably, leading to cost savings for the involved parties. We estimate a savings potential of up to 90% for some of our usecases.
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