› Payment systems: liquidity saving mechanisms in a distributed ledger environment (2017), joint testing report with Dirk Bullmann, Frederic Chorley, Cédric Humbert, Yuji Kawada, Shuji Kobayakawa, Thomas Leach and Akihiko Watanabe.
The ECB and the Bank of Japan are investigating the possible use of distributed ledger technology (DLT) in their respective payment systems. The first set of findings – focusing on liquidity saving mechanisms – are now available.
› The future of European financial market infrastructure: A business case for distributed ledger technology? (2017), joint paper with Dirk Bullmann.
Technological innovation in general, and distributed ledger technology (DLT) in particular, could become a game changer in the financial sector. Market infrastructures, which are the backbone of financial markets, need to adequately respond to technological advances and the resulting change in user needs and expectations. This paper discusses the potential impact of DLT on European financial markets and the potential scenarios of DLT adoption. Furthermore, it analyses the Eurosystem’s strategic considerations for the future of its market infrastructure and how change is embraced. Finally, it examines whether DLT could prove to be an integral part of the Eurosystem’s evolving market infrastructure and what other functions of the European Central Bank (ECB) could be affected by market actors adopting DLT. The paper contains my personal view and shall not be seen as representing any stance from institutions I work/have worked for.
› Distributed ledger technologies in financial markets?: An introduction and some points of interest for legal analysis (2017), In ESCB Legal Conference proceedings pp. 119-133.
Although “distributed ledgers” were first developed in the realm of virtual currencies, they have emerged since 2014 as an innovation that may change the current paradigm of financial markets, particularly as far as market infrastructures are concerned. This note introduces some definitions and concepts that will assist in obtaining an understanding of the potential implications of distributed ledger technologies (DLTs) for financial markets. Its specific purpose is to provide a non- self-explanatory view of those features that may be relevant from the perspective of legal and regulatory analysis. The paper contains my personal view and shall not be seen as representing any stance from institutions I work/have worked for.
› Distributed ledger technologies in post-trading – Revolution or evolution? (2015)
In this policy paper, I revise both Blockchain and non-Blockchain distributed ledger technologies (DLTs), addressing their possible impact on the post-trade industry. Different layers of the value chain will be affected to a different extent, depending on the innovation implemented by core participants ((I)CSDs and registrars). I depict three possible scenarios: 1) financial institutions use proprietary distributed ledger technologies for internal efficiency, leaving business practice as it is; 2) the industry develops a market-wide technology, allowing straight-through processes and making some layers of the value chain redundant; 3) a peer-to-peer network between investors allows trading securities on a distributed ledger developed by their issuing entities (companies org governments). The potential adoption of DLTs in post-trading appears more likely to happen as a progressive evolution of financial market infrastructures than as a disruptive revolution. The paper contains my personal view and shall not be seen as representing any stance from institutions I work/have worked for.
› Collateral management services (2015)
This policy note presents a systematic analysis of ongoing developments in the field of collateral management, and the impact of legal and regulatory reforms undertaken by public and private European institutions that use collateral management services (CMS). The note contains my personal view and shall not be seen as representing any stance from institutions I work/have worked for.
I derive the price function of securities that can be pledged as collateral, in an economy where rational investors are privately informed. Although the payoffs of borrowers and lenders have truncated distributions, the linear equilibrium is unique and has an analytic solution. Such result allows to investigate the impact of pledgeability on informational efficiency. The margin premium is shown to come with a “pledgeability bias”, which increases the conditional variance of the price function. Collateralized loans are cleared through central counterparties that base margins on an exogenous risk constraint set by regulators. I find that the price of pledgeable securities reacts asymmetrically to changes in regulatory provisions, depending on the price of liquidity: whereas lower margins inflate asset prices greatly when interest rates are low, relaxing the risk constraint during a turmoil has little effect on asset prices when the cost of external funds is above a threshold level. The impact of pledgeability contributes to explain comovement of asset prices and seemingly violations of the law of one price.
In a model of Originate-To-Distribute (OTD) banking, I show that contagion may spread before any preference shock, fire sale, or change in haircuts takes place. The drivers of contagion are opaqueness of collateral and roll-over frequency. Complexity of structured finance and poor screening of borrowers induce both originators and investors at different stages of the OTD chain to develop heterogeneous expectations on the future value of securitized debt. When new information on the value of collateral is sufficiently bad, creditors in the money market have to write down their loans to overoptimistic banks and shrink liquidity supply in the short-term. Banks with accurate pricing models are unable to roll over and go bankrupt for illiquidity reasons. I provide a set of conditions under which the industry is able to prevent contagion and policy makers shall commit to limit their intervention.
› The Impact of Large Orders in Electronic Markets (joint with M. Murgia, P. Gottardo and L. Bosetti) (2014)
This paper uses order-level data of all investors of the Italian stock exchange Borsa Italiana (BI) to resolve three issues that remained unsettled in the extant microstructure literature: the interaction between the exchange and a parallel market for large blocks; the asymmetry between the price impacts of buy and sell orders; and the behaviour of liquidity in the limit order book around large orders. Price impacts and liquidity effects of block trades at BI are surprisingly different from existing empirical literature. Our findings reveal that price effects are much lower in the electronic downstairs market than in the upstairs market. Such result is the opposite of what can be found in previous studies. Moreover, trading costs in the central limit order book at BI are lower than in any other exchange analysed in the past. We explain that in terms of exchange trading architecture. In fact, rules on block trading at BI allowed a parallel over-the-counter market to coexist with the consolidated limit order book well before market liberalization was introduced by the MIFID directive. This left the downstairs market with a selection of liquidity-driven orders and unprecedented low price impacts.
› Shall We Keep Early Diers Alive? (2014)
Most extant explanations of financial crises emphasise the role played by negative shocks on the liability side of a bank’s balance sheet. The vast literature on bank runs induced policy makers to build up a reputation as institutions willing to do anything to support the orderly fulfillment of depositors’ and interbank claims. Nonetheless, the LTCM crisis of 1998 and the Subprime crisis of 2007 are compelling examples of how the banking industry is prone to systemic disruptions even without preference shocks or domino effect. This survey argues in favour of the still marginal literature on financial crises unfolding through the asset side of banks’ balance sheets.