Journal of Financial Market Infrastructures

Risk.net

Interoperability between central counterparties

Jürg Mägerle and Thomas Nellen

  • Risk management and regulation of financial exposures resulting from links between central counterparties (CCP) is analysed.
  • Interoperability reduces exposures of CCP participants to the optimal benchmark of a single CCP at the cost of newly established exposures between CCPs.
  • Adequately regulated rehypothecation of CCP participants' margin may help to ease this trade-off without causing systemic risk.
  • Further research could focus on ways to reduce exposures between interoperable CCPs, for instance by means of adequate recovery plans and resolution regimes.

ABSTRACT

This paper analyzes the risk management and regulation of financial exposures resulting from links between central counterparties (CCPs). Interoperability is shown to enable a fragmented clearing system to reduce exposures between CCPs and their participants to the optimal benchmark of a single CCP. This comes at the cost of newly established exposures between CCPs. Due to concerns about the systemic risk implications of a formerly applied cross-CCP risk management model of European cash equity CCPs, responsible regulators have issued guidelines to eliminate systemic risk. These guidelines are shown to come at the cost of collateral requirements exceeding the optimal level. Two approaches are investigated that help to reduce collateral requirements while containing systemic risk.

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