Előadás a FinTech és banki digitalizáció workshop (BCE Gazdálkodástudományi Kar Kutatási Hét / Corvinus FinTech Center)

1. The effects of blockchain on central clearing
THE EFFECTS OF BLOCKCHAIN ON CENTRAL
CLEARING
BASED ON “DECENTRALIZED CLEARING IN FINANCIAL
NETWORKS. MANAGEMENT SCIENCE, FORTHCOMING.”
Péter Csóka1 and P. Jean-Jacques Herings2
1Department of Finance, Corvinus University of Budapest
Game Theory Research Group, Institute of Economics, Hungarian Academy of
Sciences
2Department of Economics, Maastricht University
31 May 2017

2. The effects of blockchain on central clearing
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3. The effects of blockchain on central clearing

4. The effects of blockchain on central clearing
CENTRAL CLEARING COUNTERPARTIES (CCPS)
Buyers and sellers meet in either a marketplace, such as a
regulated trading venue (exchange), multilateral trading facility
(MTF), other organized trading facility (OTF), or they meet
through informal means, like with over-the-counter (OTC)
transactions.
After the price discovery, execution and matching processes,
the CCP offers counterparties credit enhancement services
through trade novation, allowing each counterparty to replace
the credit risk of the other with that of the CCP. The CCP takes
collateral to help absorb potential losses in case of any
counterparty credit event.

5. The effects of blockchain on central clearing
BILATERAL NETTING AND DISTRIBUTED LEDGER
TECHNOLOGY (DLT)
Consider a situation in which counterparty A needs to make a
variation margin payment of $300,000 to counterparty B due to
a futures portfolio, whereas counterparty B needs to make a
variation margin payment of $200,000 to counterparty A due to
an interest-rate swap agreement.
account A B
10,000 0 300,000
0 200,000 0
DLT would enable this transfer of $10,000 to B, who in turn
would send it back. The process iterates until we get
account A B
0 0 90,000
10,000 0 0

6. The effects of blockchain on central clearing
MULTILATERAL NETTING
account A B C
10,000 0 100,000 0
0 0 0 100,000
0 100,000 0 0
At the end of a similar process no payments are required and A
gets back it money. Csoka and Herings (2017) call such a
process a decentralized clearing process and show that, under
some conditions, it terminates in finite steps in a situation which
is essentially the same as solving the clearing problem
centrally. The important conditions are that there is a unit of
account (like cents) and that if a counterparty has to pay to
multiple parties, in each iteration the payment rules (being
proportional or having some priority structure) should be kept.

7. The effects of blockchain on central clearing
THE IMPORTANCE OF THE PAYMENT RULES, BILATERAL
NETTING
account A B C
100,000 0 300,000 300,000
300,000 300,000 0 0
0 0 0 0
Using bilateral netting the liabilities between A and B are
cancelled ( both A and B pay $300,000 to each other) and A
pays $100,000 to C.
account A B C
0 0 0 200,000
300,000 0 0 0
100,000 0 0 0

8. The effects of blockchain on central clearing
THE IMPORTANCE OF THE PAYMENT RULES,
PROPORTIONAL PAYMENTS
account A B C
100,000 0 300,000 300,000
300,000 300,000 0 0
0 0 0 0
Select B, then A (to pay maximum) to get
account A B C
400,000 0 300,000 300,000
0 0 0 0
0 0 0 0
account A B C
0 0 100,000 100,000
200,000 0 0 0
200,000 0 0 0

9. The effects of blockchain on central clearing
DECENTRALIZED CLEARING, PROPORTIONAL PAYMENTS
account A B C
100,000 0 300,000 300,000
300,000 300,000 0 0
0 0 0 0
You can reach a centralized solution decentralized ways by
selecting A and B in any order and having them pay any in
accordance with their payment rules.
First select A to pay from its account of $100,000 proportionally
account A B C
0 0 250,000 250,000
350,000 300,000 0 0
50,000 0 0 0
Then, select B to pay only $200,000 (say, the more liquid part
of it current balance) to A.

10. The effects of blockchain on central clearing
DECENTRALIZED CLEARING (2)
account A B C
200,000 0 250,000 250,000
150,000 100,000 0 0
50,000 0 0 0
Select A again
account A B C
0 0 150,000 150,000
250,000 100,000 0 0
150,000 0 0 0
Now select B
account A B C
100,000 0 150,000 150,000
150,000 0 0 0
150,000 0 0 0

11. The effects of blockchain on central clearing
DECENTRALIZED CLEARING (3)
and finally select A to get
account A B C
0 0 100,000 100,000
200,000 0 0 0
200,000 0 0 0
Now that there are no payment possibilities, the procedure
stops and declares A bankrupt (whereas B has paid all of its
liabilities). Note that in each step, only information related to
one trader is required: it is enough to know the current level of
margin account, total liabilities and payments made so far.

12. The effects of blockchain on central clearing
THE LEVEL OF GENERALITY IN OUR DECENTRALIZED
CLEARING PROCEDURE
Any individual bankruptcy rule can be used (but have to be
used consequently, it is not enough to be forced to pay ),
The selection method among the eligible agents can be
random or deterministic, history dependent or not:
alphabetic order, highest remaining liabilities, etc.,
If there are more eligible agents, more than one could also
be simultaneously selected,
It can also be used if we only know the endowments and
the liabilities of the agents so far selected.

13. The effects of blockchain on central clearing
BANKRUPTCY IN NETWORKS, CONTAGION
Financial networks (the value of a liability might be
calculated by a smart contract)
Brown (1979) presents an application of a supply chain
network consisting of coal mines and power companies,
where due to a strike only the non-union mines produce.
International student exchange problems, where the
agents correspond to colleges.
The endowments of a college equal the number of students
it can handle, its liabilities correspond to commitments
made to receive incoming students, and claims are the
agreements with other colleges to send outgoing students.
The agents are servers that process jobs for a set of users.
The endowments of a server correspond to its capacity for
processing jobs, its liabilities to jobs that it has to process
for other servers, and its claims to jobs that are outsourced
to other servers.

14. The effects of blockchain on central clearing
SUMMARY OF THE DECENTRALIZED CLEARING PAPER
We consider network bankruptcy problems with general
bankruptcy rules in a discrete setting.
Clearing payment matrices have a lattice structure;
induced levels of equity can differ, but differences are
bounded.
Decentralized clearing leads to the least clearing payment
matrix, centralized clearing leads to the greatest clearing
payments matrix.
When the unit of account is sufficiently small, all
decentralized clearing processes lead essentially to the
same value of equity as a centralized clearing procedure.
As a policy implication, it is not necessary to collect and
process all the sensitive data of all the agents
simultaneously and run a centralized clearing procedure.

15. The effects of blockchain on central clearing
Thank you for you attention, looking forward to your questions
and remarks.