Breaking the mould with caution : Promises and risks of crypto-inspired clearing models in traditional central clearing

Abstract

While numerous crypto exchanges have failed, their innovative clearing models may hold value for the traditional central clearing space. After describing the representative model of traditional clearing and with its strengths and challenges, this paper reviews the external pressures that often dissuade central counterparties (CCPs) from deviating from this archetype. The paper reviews the design innovations in post-trade services in crypto markets and critically examines the potential for implementing certain facets of such alternate models in traditional clearing contexts, taking a view of their promises as well as risks. The paper strongly advocates for a contingency-based approach to CCP design and discusses specific contexts where alternate clearing models could prove valuable for the markets. This journey must preserve the balance of efficiency and safety, anticipation and prudence, in order to maintain the resilience of CCPs while redesigning crucial procedures for improved market services.