Paper: arXiv 2605.02436

Authors: Tomaž Fleischman, Ethan Buchman

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.

Complexity vs Empirical Score

  • Math Complexity: 5.5/10
  • Empirical Rigor: 3.0/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper relies on graph theory and network topology to model balance sheet compression, but primarily functions as a theoretical architectural proposal rather than a backtested quantitative model. While it cites macro-economic data and existing regional precedents, it lacks the raw datasets and rigorous performance metrics required for a fully backtest-ready financial paper.

Research Flowchart

  flowchart TD
    A[<b>Goal:</b> Integrate trade credit into market clearing to deepen liquidity] --> B[<b>Inputs:</b> Financial obligations as directed graph edges]
    B --> C[<b>Methodology:</b> Multilateral clearing via atomic cycle execution]
    C --> D[<b>Processes:</b> Balance sheet compression & distributed accounting]
    D --> E[<b>Outcome 1:</b> Compression layer for CCPs]
    D --> F[<b>Outcome 2:</b> Extension of settlement to real-economy trade credit]
    E --> G[<b>Impact:</b> Scalable, non-novation-based clearing network]
    F --> G

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and 31 more
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  2. Trade credit and stock liquidity (2020)
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  4. Variation Margin Settlement Whitepaper (2017)
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0 of 39 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.