In a white paper published today, EuroCCP presents a series of recommendations to address regulatory concerns about potential systemic risk problems that may result when multiple equities central counterparties (CCPs) in Europe interoperate.
"We share the regulators' concerns. Arrangements between multiple, competing CCPs, where each CCP becomes a counterparty to the other interoperating CCPs, requires a new framework for managing the liquidity and credit risks such arrangements may create"
Regulators have put on hold interoperability arrangements in Europe pending a full review of the systemic risks attached to multi-CCP interoperability. The paper released today provides EuroCCP's perspective and outlines possible approaches to mitigating these risks.
"We share the regulators' concerns. Arrangements between multiple, competing CCPs, where each CCP becomes a counterparty to the other interoperating CCPs, requires a new framework for managing the liquidity and credit risks such arrangements may create," said Diana Chan, CEO of EuroCCP. "EuroCCP wishes to work with others in the industry to craft an approach that manages these risks properly, in both normal and extreme market conditions. Proposals have to be scalable and allow competition to flourish in Europe's equity markets."
The paper, Recommendations for Reducing Risks Among Interoperating CCPs, discusses several options and offers four primary recommendations:
1. CCPs should augment their existing default funds to cover potential close-out losses in the event of an interoperating CCP's default.
2. An Interoperability Convention, to provide transparency of arrangements between interoperating CCPs, should replace confidential bilateral agreements.
3. Commercial barriers to interoperability should be removed. Each market participant should be able to choose which CCP they use.
4. Longer term, further consideration should be given to inter-CCP netting, whereby a netting agent would be established to determine each CCP's net securities and cash position against the other CCPs.
"EuroCCP aims to make interoperability safer and easier. Collective action among CCPs and engagement with market participants and regulators is essential to delivering the benefits of interoperability," Chan said.
The paper is part of EuroCCP's drive to build a stronger European equities market through promoting competition, reducing frictional costs and strengthening risk standards.