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
issuerdeposits 1000 Lovelace in theinvestor's account, and that is then immediately paid to theinvestorin full; - if the
investordoesn'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 theinvestorloses 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
zeroCouponBondcontract in which it is necessary for theissuerto put the full value of the up before the bond is issued.
Exercise
Give a variant of the
zeroCouponBondcontract which also includes aguarantorwho 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
zcouponBondFor3Month12Percentcontract which also includes aguarantorwho 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.
ACTUS Contract Terms
In general, an ACTUS contract is specified by the ACTUS contract terms. The technical specification of the ACTUS taxonomy defines all the parameters that are allowed in the ACTUS contract terms in a dictionary. ACTUS contract terms fully describe a financial contract and, therefore, allow projected cashflows to be generated. The projected cashflows are then used as a basis to generate Marlowe contracts corresponding to ACTUS contract terms.
The ACTUS Principle At Maturity (PAM) contract is a loan with periodic interest payments on a fixed schedule and a final payment of the principal.
Example ACTUS contract terms: one installment of interest, followed by the repayment of the principal.
{
"contractType": "PAM",
"contractID": "pam example",
"statusDate": "2023-12-31T00:00:00",
"contractDealDate": "2023-12-28T00:00:00",
"currency": "ADA",
"notionalPrincipal": "20",
"initialExchangeDate": "2024-01-01T00:00:00",
"maturityDate": "2025-01-01T00:00:00",
"nominalInterestRate": "0.1",
"cycleAnchorDateOfInterestPayment": "2025-01-01T00:00:00",
"cycleOfInterestPayment": "P1YL0",
"dayCountConvention": "30E360",
"endOfMonthConvention": "SD",
"premiumDiscountAtIED": " 0",
"rateMultiplier": "1.0",
"contractRole": "RPA"
}
The example produces the following projected cashflows:
| Contract Id | Event Type | Event Time | Amount | Currency |
|---|---|---|---|---|
| PAM example | IED | 2024-01-01 00:00:00:000 | -20.0 | ₳ |
| PAM example | IP | 2025-01-01 00:00:00:000 | 2.0 | ₳ |
| PAM example | MD | 2025-01-01 00:00:00:000 | 20.0 | ₳ |
The projected cashflows are translated into the following Marlowe contract:
When [
(Case
(Deposit
(Role "party")
(Role "party")
(Token "" "")
(Constant 20000000))
(Pay
(Role "party")
(Party
(Role "counterparty"))
(Token "" "")
(Constant 20000000)
(When [
(Case
(Deposit
(Role "counterparty")
(Role "counterparty")
(Token "" "")
(Constant 2000000))
(Pay
(Role "counterparty")
(Party
(Role "party"))
(Token "" "")
(Constant 2000000)
(When [
(Case
(Deposit
(Role "counterparty")
(Role "counterparty")
(Token "" "")
(Constant 20000000))
(Pay
(Role "counterparty")
(Party
(Role "party"))
(Token "" "")
(Constant 20000000) Close))] 1735689600000 Close)))] 1735689600000 Close)))] 1704067200000 Close
The ACTUS specification is implemented in a separate repository.