Contingent Claims Tree on Ledger vs On-the-Fly Creation

Different Ways to Create and Store the Contingent Claims Tree

We have seen two different ways of modeling a fixed coupon bond using Contingent Claims:

Explicitly Storing the Contingent Claims Tree on the Ledger

When we use the Generic extension, we create the claims tree at instrument inception and store this representation explicitly on the ledger. Since the tree is stored statically it can only change if the instrument is updated on ledger. For example, after a coupon payment a new version of the instrument (excluding the coupon just paid) supersedes the previous version. However, in the event of a change in a holiday calendar (which could be used to define the coupon payment dates), the tree will not automatically change.

Calculating the Contingent Claims Tree On-the-Fly

In contrast, when we create a strongly typed bond instrument, only the key parameters of the bond are stored on the ledger. The claims tree is not, it is created on-the-fly when needed (for example, in the case of lifecycling). Consequently, if a holiday calendar changes, this will automatically impact the claims tree the next time it is dynamically created.

Which Is Preferred?

Both options are possible, this is more a matter of personal preference. They both have their pros and cons.

The on-the-fly approach has the advantage that the claims tree can adapt to changes in reference data like holiday calendars. Also, if the economic terms of the instrument would result in a very large claims tree it could be desirable not to store it on the ledger for performance reasons.

On the other hand, if you need to quickly create a one-off instrument, the on ledger approach allows you to create the claims directly from a script, without first having to define a dedicated template. Also, if the Contingent Claims representation is actively used by both counterparties of the trade it could be useful to have it on ledger from a transparency point of view. Similarly, if you need to explicitly keep the Contingent Claims representations of older versions of the instrument on the ledger, for example for auditing reasons, that would be achieved out of the box.