Deepening the Secondary Market: Integrating Trade Credit into Market Clearing with the Cycles Protocol

2026-05-04

AI Summary

This study addresses the overreliance of existing post-trade clearing systems on cash-like collateral, which overlooks the short-term liquidity embedded in trade credit. To remedy this, the paper proposes Cycles—a distributed multilateral clearing protocol grounded in double-entry accounting and atomic cycle execution. By modeling debt relationships uniformly as a directed graph, Cycles achieves balance sheet compression without altering counterparty structures or requiring novation. The protocol is the first to formally integrate the liquidity of trade credit networks into a structured clearing framework, establishing a compression layer that bridges market participants with central counterparties. Furthermore, it extends clearing functionality into real-economy financing contexts, thereby substantially enhancing the depth of secondary market liquidity.

Abstract

Current post-trade clearing systems rely almost exclusively on cash or cash-like collateral, leaving vast reserves of short-term liquidity embedded in trade credit outside formal settlement infrastructures. A key barrier to integrating this liquidity is the near-universal dependence of clearing services on novation, which imposes institutional overhead that restricts accessibility and limits the range of obligations that can be brought into settlement. This paper introduces the Cycles Protocol: a distributed, multilateral clearing mechanism based on double-entry accounting and atomic cycle execution that maximizes balance sheet compression. Unlike novation-based clearing, Cycles does not redistribute counterparty risk; it can thus be applied generally to existing financial networks, without any change in counterparty relations, allowing it to complement existing clearing systems and Central Counterparties (CCPs). By representing commitments as edges on a unified directed graph, Cycles surfaces liquidity hiding within existing network structure. We focus here on two applications of Cycles to deepening secondary market liquidity: first, as a compression layer between existing clearing participants and CCPs; and second, as a means to incorporate the liquidity of the trade credit network into formal settlement, extending market clearing beyond financial obligations and into real-economy financing.

Problem

• trade credit
• market clearing
• novation
• liquidity
• settlement infrastructure

Innovation

• Cycles Protocol
• trade credit
• market clearing
• balance sheet compression
• atomic cycle execution