Abstract
Implementing smart contracts to automate the performance of high-value over-the-counter (OTC) financial derivatives is a formidable challenge. Due to the regulatory framework and the scale of financial risk if a contract were to go wrong, the performance of these contracts must be enforceable in law and there is an absolute requirement that the smart contract will be faithful to the intentions of the parties as expressed in the original legal documentation. Formal methods provide an attractive route for validation and assurance, and here we present early results from an investigation of the semantics of industry-standard legal documentation for OTC derivatives. We explain the need for a formal representation that combines temporal, deontic and operational aspects, and focus on the requirements for the temporal aspects as derived from the legal text. The relevance of this work extends beyond OTC derivatives and is applicable to understanding the temporal semantics of a wide range of legal documentation.
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Notes
- 1.
For example, “what if?” scenarios might posit a sequence of actions by the parties, or possible changes in the law during the running of the code, together with the required outcome.
- 2.
Derivatives contracts often last 5 years and can last as long as 30 years.
- 3.
There are two versions in common use: the 1992 ISDA Master Agreement and the 2002 ISDA Master Agreement.
- 4.
Derivatives contracts may involve more than two parties.
- 5.
It may also be possible to attach additional terms and conditions, including additional credit support, to individual transactions.
- 6.
For the rest of this paper we assume the 2002 ISDA document set.
- 7.
For example, a single legal clause may be represented by more than one expression in the formal semantics (perhaps distant from each other), and vice versa two or more legal clauses might be represented by a single expression in the formal semantics.
- 8.
The existence of a unique canonical form (computable in reasonable time) will depend on the logic employed, and the properties of its operators. Where many logics are combined the existence of a unique canonical form may become problematic.
- 9.
Which might be the duration of an obligation.
- 10.
The property “General Business Day” is described in a generic way so that it could potentially apply to an infinite number of dates, but a property could also be described in a way that it could apply to only a finite number of dates.
- 11.
Conceivably this phrase might be used to refer to a date associated with a document, which raises the further issue of associating objects with temporal values.
- 12.
In the context of the ISDA Master Agreement it might sometimes be preferable to phrase this as a continuous prohibition to engage in an event that generates a Potential Event of Default or Potential Termination Event.
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Acknowledgements
The authors are grateful to UCL students Justin Jude and Mengyang Wu who assisted this work by reviewing logic frameworks and providing supporting tools.
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Clack, C.D., Vanca, G. (2018). Temporal Aspects of Smart Contracts for Financial Derivatives. In: Margaria, T., Steffen, B. (eds) Leveraging Applications of Formal Methods, Verification and Validation. Industrial Practice. ISoLA 2018. Lecture Notes in Computer Science(), vol 11247. Springer, Cham. https://doi.org/10.1007/978-3-030-03427-6_26
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