Monday, August 27, 2012

Decentralized Clearing of Financial Instruments

The existing central clearing houses are now confronted with an unpleasant choice of continuing with their role of order matching of traditional products at a competitive rates or trying to capture a new explosive over-the-counter (OTC) market albeit with drastic and therefore changes in their methodology.

The regulatory bodies are encouraging the OTC market participants to embrace some sort of clearing for  price transparency and a means of risk management. The privileged classes of OTC markets, namely energy and financial industries will probably lose their present status of exemption from Commodity Futures  Trading Commission (CFTC) rules and regulations in the near future forcing central clearinghouses to undergo the necessary and anti-monopoly type of changes.

While the idea of centralized clearing did-and still serves- the valuable purpose of mass and hence cheap way of clearing financial dealings, the nature of OTC market is by definition a largely clustered bilateral trades defying uniformity and centralization. Even, as in the case of energy market, the private central clearinghouses of Intercontinental Exchange (ICE)  will not be able to attract any significant share of OTC market; neither will Bank of America with its newly introduced clearinghouse for OTC financial products.

The new concept that can truly address this challenge is a distributed intelligent self-contained clearing Node with full interconnectivity. This patented technology can be compared succinctly with the legacy of central clearing below.


Central Clearinghouse versus   Open Clearing Node
a. complex general purpose design a. simple, efficient and configurable
b. high cost of operation, b. low cost and no maintenance  
c. rigidity with respect to new application c. highly flexible
d. legacy, resisting change d. new concept, highly adaptable
e. high risk e.limited in scope and size  

f. requiring high level management f. small team, minimum supervision
g. too many disparate  parts g. seamlessly integrated
h. global reach through relationship h. real time inter-networked
k. no matching engine k. built-in

Specific Issues


a. Netting a. Distributed Node allows reporting of all transaction
b. Risk management b. Any algorithm /real-time mark-to market

  1. c. Cross product margin c. Inter-connected Nodes are product specific
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