ACTUS and Marlowe

This tutorial gives an introduction to the general idea of the ACTUS standards for the algorithmic representation of financial contracts, plus examples implemented in Marlowe.

ACTUS

The ACTUS Financial Research Foundation https://www.actusfrf.org has created a standard for financial contracts, categorised by means of a taxonomy and described in a detailed technical specification.

The ACTUS standards build on the understanding that financial contracts are legal agreements between two (or more) counterparties on the exchange of future cash flows. Historically, such legal agreements are described in natural language leading to ambiguity and artificial diversity. As a response, the ACTUS standards define financial contracts by means of a set of contractual terms and deterministic functions mapping these terms onto future payment obligations. Thereby, it is possible to describe the vast majority of financial instruments through a set of little more than 30 Contract Types or modular templates, respectively.

The ACTUS specifications provide a breadth of exercises for implementation in Marlowe, and we illustrate an approach to this in the following example.

Simple Zero Coupon Bond Example

A zero-coupon bond is a debt security that does not pay interest (a coupon) but is issued at a discount, rendering profit at maturity when the bond is redeemed for its full face value.

For example, an investor can buy a bond that costs 1000 Lovelace with 15% discount. She pays 850 Lovelace to the bond issuer before start time, here 1672531200 (2023-01-01 00:00:00 GMT).

One month later, after maturity date, time 1675209600 (2023-02-01 00:00:00 GMT) here, the investor can exchange the bond for its full notional, i.e. 1000 Lovelace.

When [
  (Case
     (Deposit
        "investor"
        "investor" ada
        (Constant 850))
     (Pay
        "investor"
        (Party "issuer") ada
        (Constant 850)
        (When [
           (Case
              (Deposit
                 "investor"
                 "issuer" ada
                 (Constant 1000))
              (Pay
                 "investor"
                 (Party "investor") ada
                 (Constant 1000)
                 Close))
            ]
            1675209600
            Close)))
     ]
     1672531200
     Close

This contract has a significant drawback. Once the investor has deposited the 850 Lovelace, it will be immediately paid to the issuer (if the investor does not invest in time, the contract ends). After that, two outcomes are possible

  • the issuer deposits 1000 Lovelace in the investor’s account, and that is then immediately paid to the investor in full;

  • if the investor doesn’t make the deposit, then the contract is closed and all the money in the contract is refunded, but there is no money in the contract at this point, so the investor loses her money.

How can we avoid this problem of the issuer defaulting?

There are at least two ways to solve this: we could ask the issuer to deposit the full amount before the contract begins, but that would defeat the object of issuing the bond in the first place. More realistically, we could ask a third party to be a guarantor of the deal.

Exercise

Give a variant of the zeroCouponBond contract in which it is necessary for the issuer to put the full value of the up before the bond is issued.

Exercise

Give a variant of the zeroCouponBond contract which also includes a guarantor who puts up the full payment up before the bond is issued, and who will pay that counterparty if the issuer defaults; if the issuer does make the payment in time, then the guarantor should recover their money.

Guaranteed Coupon Bond Example

This more complex bond involves an investor who deposits 1000 Lovelace, which is immediately paid to the issuer. The issuer then has to pay as interest 10 Lovelace every month. On maturity the investor should receive back the interest plus the full value of the bond.

couponBondFor3Month12Percent =
    -- investor deposits 1000 Lovelace
    When [ Case (Deposit "investor" "investor" ada (Constant 1000))
        -- and pays it to the issuer
        (Pay "investor" (Party "issuer") ada (Constant 1000)
            -- after 1 month expect to receive 10 Lovelace interest
            (When [ Case (Deposit "investor" "issuer" ada (Constant 10))
                -- and pay it to the investor
                (Pay "investor" (Party "investor" ) ada (Constant 10)
                    -- same for 2nd month
                    (When [ Case (Deposit "investor" "issuer" ada (Constant 10))
                        (Pay "investor" (Party "investor" ) ada (Constant 10)
                            -- after maturity date investor
                            -- expects to receive notional + interest payment
                            (When [ Case (Deposit "investor" "issuer" ada (Constant 1010))
                                (Pay "investor" (Party "investor" ) ada (Constant 1010) Close)]
                            1680307200 -- 2023-04-01 00:00:00 GMT
                            Close))]
                    1677628800 -- 2023-03-01 00:00:00 GMT
                    Close))]
            1675209600 -- 2023-02-01 00:00:00 GMT
            Close))]
    1672531200 -- 2023-01-01 00:00:00 GMT
    Close

Exercise

Give a variant of the zcouponBondFor3Month12Percent contract which also includes a guarantor who puts up the full payment up before the bond is issued, and who will pay that counterparty if the issuer defaults; if the issuer does make the payment in time, then the guarantor should recover their money.