What Is the Role of a Central Counterparty (CCP) and How Might DLT Replace or Augment It?

A CCP steps between the buyer and seller of a derivatives contract, becoming the buyer to every seller and the seller to every buyer. This guarantees the trade, reducing counterparty risk.

DLT can augment a CCP by automating post-trade processing and collateral management. Alternatively, a decentralized protocol using smart contracts and on-chain collateral can potentially replace some CCP functions by trustlessly guaranteeing settlement and managing risk directly on the ledger.