We are pre-qualified for cash in advance, in the pits

Matt Levine is concerned about credit reliability with loan agreements.  He talks about it in terms of interest rate swaps, which he explains.  But it is the general problem we deal with in ringed fence, how a contract operates on fails to deliver. The sandbox is built around cash in advance, all parties pre-qualified. How do we do that?

This is where intelligent cash cards work, the card can insure a credit rating, statistically, contracted with the thump print. If a user establishes that he keeps about 10% of liquidity in cash, then the user has backing, statistically, to take cash in advance from the currency issuer, and suffer unexpected interest charges later. If the user breaks the liquidity contract, he has already agreed to be liable to the return of the cash, the smart card triggers a resolution of any interest rate swap in response.

On net, all parties operate with the computed distribution of likely 'fails to deliver', we can compute the distribution of volatility in run time.. The issue Matt Levine brings up is real, it is general price uncertainty which is shared between borrower and depositor (or bid and ask in general).  The global risk is computed and traded in real time when contracts are statistically bound. 

The contracts become simple because the secure element supports any valid monetary system, by voluntary contract. The good money systems will contain the fails to deliver distribution so it is bettable, everything micro-priced.

That means that if interest rates move sharply against me -- if Libor goes to 10 percent -- then I have to come up with $100 each year, and you have to trust that I'm good for it. And that trust usually comes in the form of credit support annexes and collateral posting and the possibility of suing me and so forth, a whole apparatus that lets market participants trust that their counterparties will pay them in the future.

Don't worry, we got this covered, we got the theory of everything..

 The theory, a bit of. The prior agreement, the credit setting contract that gets one pre-qualified forces sphere packing behavior. If you keep a volatile loan/deposit ratio, then you will be auto trading smaller amounts more frequently. Conversely, the same pit trades those against users who keep loans/deposits more stable, making large changes less frequently.  The pit boss forces mark to market because there is a minimum interest charge that maps the two groups, a spreadsheet function of known properties..

In this manner, the frequency of fails to deliver is statistically bound, and can be covered by a fair insurance payment. The insurance fee is priced, prevents congestion.  But the fee makes is unprofitable to be in the pit unless your are doing interest rate swaps.  In this manner, we can take any economic groups (they sphere pack) and find a containment market inside a pit.