Journal of Financial Market Infrastructures

Risk.net

The challenges of derivatives central counterparty interoperability arrangements

John McPartland and Rebecca Lewis

  • A short can clear at one CCP and the long can clear at a different CCP if the CCPs have an interoperability arrangement.
  • Interoperable CCPs quickly become each other's largest clearing members.
  • Large concentrated clearing members are subject to super-margin requirements.
  • There are no obvious sources of super-margin assets to satisfy any super-margin obligations.

ABSTRACT

It has been posited that, because central counterparties (CCPs) that clear European securities have established successful interoperability arrangements, European CCPs that clear derivatives contracts should be required to enter into similar interoperability arrangements. (Technically, market participants exchange the "interest" in the equity security that the relevant European Central Securities Depository has in the equity security that it holds. That being said, these "interests" are nonetheless exchange traded, cleared and settled as though they were the actual underlying security.) The premise is that doing so would potentially foster competition among derivatives CCPs and, ideally, tend to weaken the one-to-one relationship between a derivatives trading venue and its exclusive CCP. This paper challenges the plausibility of this premise on its daunting operational challenges, rather than from a public policy perspective.

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