He said he doesn’t think new technology will make the organization obsolete because much of the financial world relies on the clearinghouse system. Central counterparty clearinghouses ensure that trades are completed, even if one party defaults, by serving as the counterparty to the buyer and the seller. A participant in the trade doesn’t have to worry that the person on the other side can’t honor the contract. DTCC owns the main clearinghouse for stock trades.
The brokers who use the clearing services have to provide cash to protect against loss, and this protection might be lost without such a system, he said. His organization is owned by its users, who have an incentive to monitor how it’s working, he added.
Paxos says its settlement service is the first example in the modern era of stock trading that will take place outside of the clearinghouses. It argues that the traditional system has become a central point of risk in the years since the financial crisis, now that financial markets rely on them more heavily to protect markets from defaults.
Even as lawmakers and regulators leapt to repair the damage from the last financial crisis, there were no real fundamental changes to clearinghouses, Cascarilla argues. The Dodd-Frank Act gave much more responsibility to clearinghouses in protecting markets for financial derivatives. While their role increased, the underlying technology hasn’t advanced considerably, he says.
Paxos’ clearing between two parties is called bilateral clearing. In the past, bilateral record keeping was cumbersome, and it was hard for entities to quickly figure out the identities of various parties. Unwinding transactions proved very difficult, he said. But Paxos is able to use blockchain to determine “who owns what when,” in Cascarilla’s words.
2020-03-24 11:04:39Z
https://www.rollcall.com/2020/03/24/fintech-firms-say-new-tech-could-speed-recovery-from-covid-19/
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