Vermiculus, a real-time clearing solutions provider, and GreySpark Partners, a business and technology consultancy, have jointly published a report on real-time collateral management. The paper argues that collateral management via distributed ledger technology (DLT) has limitations and proposes using tokenised assets and currencies as collateral, as a better alternative.
“DLT adoption beyond the crypto markets remains limited,” the paper claims. It concedes that “there is little disagreement that the technology is interesting and could prove useful”, but adds that the industry “has yet to reach consensus on what that utility might be”.
The report lists a few reasons for the limitations of DLTs. One is that CCPs and market infrastructures often face high and unpredictable transaction volumes. It remains unclear whether existing ledgers can scale to meet demands. Even the most established ledgers, such as Bitcoin and Ethereum blockchains, can only process between seven and 30 transactions a second – barely even a drop in the ocean compared to the hundreds, or thousands processed on traditional exchanges. Another is that a fundamental feature of DLT is transparency, which might be at odds with the need for privacy in an industry that works with private or commercially sensitive data.
Preferred alternative
The paper proposes tokenisation of assets and currencies to be used as collateral, as “an alternative solution” that “would not require a wholesale change to the industry infrastructure”.
A central (as opposed to distributed) system would be operated by a CCP or several interoperating CCPS. Physical transactions would continue to occur outside the system, but digital assets would replicate these transactions within the centralised system.
“A wide range of actions could be performed within the system: digital assets could be created, holdings could be pledged or transferred between accounts instantly, and collateral could be valued using bespoke programmable rules, covering haircuts, eligibility criteria, concentration limits, and rates embedded directly into the tokens. The system would support all required settlement types, including Delivery versus Payment (DVP), delivery-only and cash-only, enabling quick and transparent settlements processes,” the paper describes.
Perhaps most importantly, the proposed approach “would be capable of handling large volumes of assets, instruments, accounts, currencies, and transactions, including both sustained and peak volumes, and would be deployable either in the cloud or on premise to meet jurisdictional and organisational requirements.
