Clearinghouses are already, by definition, too big to fail, but blockchain could be instrumental in reducing the risks, according to Steve Grob, director of group strategy at Fidessa.
In a blog, Grob addressed the industry concern that the merger of the London Stock Exchange and Deutsche Börse could create a dangerously large clearinghouse. He argued that, in fact the clearinghouses in question, LCH and Eurex clearing, are already too big to fail, even before the merger.
He said: “Imagine the fallout if either of these were to go through some sort of disorderly meltdown – would the UK or German governments really just sit back and watch?”
Grob pointed out that these types of clearinghouses only exist to provide confidence in the financial system, effectively underwriting transactions and acting as a “buyer or seller of last resort”.
Therefore, he said, they are “by definition, too big or important to be allowed to fail”.
He went on to suggest that this does not mean that spreading risk across more clearing venues is safer. Each clearinghouse operates its own risk management systems, while most also strive to provide capital efficiency through margin offsets.
“This might make things complicated if positions across multiple clearing houses needed to be unwound in a hurry,” he said.
Grob concluded that the transactional risk could be addressed by new technologies like blockchain, which could allow transactions to be completed much more quickly.
He said: “If things really did go pear-shaped, then the clearinghouses would have to be kept upright however many or few of them existed. This only serves to highlight the reality that the only way to avoid transactional risk altogether is to make those transactions instantaneous.”
“It’s no wonder, then, that there’s so much chatter around distributed ledger technology – also known as blockchain. But, imagining a solution and practically implementing it everywhere, for every asset class, are two completely different things.”
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