Decentralised clearing? An assessment of the impact of DLTs on CCPs

Recent years have witnessed noticeable expansion of new technologies related to distributed ledger technology (DLT) and blockchain networks in financial markets. As developments unfold, the key question that emerges is whether these technologies would work to foster traditional services or, conversely, would challenge their existence. Similar reflections exist for specific parts of the financial system. In particular for central counterparties (CCPs), proof-of-concepts and theoretical exercises have been conducted aiming at responding to such questions. While empirical experiences are yet to mature, theoretical exercises have suggested the impact on CCPs could be substantial, if not detrimental. The objective of this paper is to contribute to the literature and investigate the impact of DLTs on CCPs. Different from previous exercises, the paper resorts to the economic theory of financial service intermediation to substantiate the assessment. Using functional analysis and good type categorisation, the main conclusion of the paper is that under the current offering it seems challenging to foresee a scenario where any of the main services provided by a CCP would disappear or become fully disintermediated. The supporting argument is that the core functions of a CCP orbit around risk management, provided either as private or club type of good. Until now new technologies do not seem able to change the nature of these services and, therefore, render fundamental changes to CCPs less likely.