Eurex recently released a whitepaper examining the role of central counterparties (CCPs) in a distributed ledger technology (DLT) environment.
By enhancing settlement processes, improving collateral management, strengthening risk management frameworks, and facilitating integration and standardization, central counterparties (CCPs) have significantly contributed to a more resilient, efficient, and secure financial ecosystem since their establishment in the 20th century.
The role of CCPs in a digital environment, including distributed ledger technology (DLT), is multifaceted and essential for the successful digital transformation of financial markets. By acting as a bridge between centralized finance (CeFi) and decentralized finance (DeFi) ecosystems, CCPs can ensure a seamless transition to a newly created digital financial ecosystem. This integration is crucial for leveraging the benefits of DLT while maintaining the robustness and reliability of existing financial infrastructures – thus combining the benefits of both worlds.
CCPs demonstrated operational robustness in DLT-based environments, confirming that their clearing processes and risk methodologies remain effective regardless of the underlying technology. This also underscores the critical role of CCPs in maintaining stability within financial markets, ensuring that transactions are processed smoothly, securely, and in a risk mitigating manner.
Collateral on DLT
An example of how the transfer of securities for collateralization purposes can be made more efficient was demonstrated by Eurex Clearing in its engagement in market initiatives related to tokenization and DLT. Eurex Clearing, Clearstream, HQLAX and J.P. Morgan designed and tested a service that facilitates the posting of margin collateral by CCP members through the HQLAX digital ledger to Eurex Clearing’s traditional collateral location, Clearstream Banking Luxembourg (CBL).
The service provides for the tokenization of a traditional security in a first step, which is managed through the HQLAx platform. The second step fosters the facilitation of the transfer of collateral from the custodian of choice of the relevant clearing member to CBL as an approved collateral location for Eurex Clearing. The nature of the collateral assets remains unchanged, ensuring compliance with existing CCP regulations. This service has received a regulatory non-objection and is expected to be launched in the second quarter of 2025.
Settlement finality
In another example, Eurex highlighted delivery reliability as part of the ECB exploratory work. The concept of legal settlement finality is distinct from but connected to the concept of delivery reliability. Eurex Clearing´s experience demonstrated that on the CCP level, the settlement finality provisions of the CCP apply; the delivery obligation becomes irrevocable on the CCP level as soon as trades are novated or in case of open offer after the matching of the respective trade orders.
Eurex Clearing demonstrated that this can be applied to DLT-based securities, such as electronic securities issued under the German Electronic Securities Act (eWpG). The subject of the test was a native digital commercial paper, issued on Clearstream’s D7 platform by ABN AMRO Bank, traded on the Eurex Repo F7 platform and cleared by Eurex Clearing. In addition to delivery reliability, the settlement finality provisions of the clearing conditions of Eurex Clearing applied. The obligation to transfer the commercial paper became irrevocable on the CCP level as of the time of the matching of the respective orders on the Eurex Repo F7 platform.
“Our experiences demonstrate that the participation of a CCP in a decentralized ecosystem enhances market stability by employing consistent risk management practices and serving as the ‘golden source’. Eurex Clearing will continue to engage with both the market and regulators – fostering market integrity while enabling the adoption of transformative technologies,” said Efthimia Kefalea, director of Collateral & Repo Clearing Design at Eurex Clearing, as cited in the whitepaper.