Are we facing European CCP interoperability regulation?

Towards the end of 2009, the regulatory authorities unexpectedly blocked plans by UK, Dutch and Swiss-based central counterparties (CCPs) to interoperate. They feared that linking multiple CCPs together would create a significant risk to the wider financial system. In a joint letter, the regulators outlined their position on interoperability, in an effort to allay fears about systemic risks and inject fresh competition into the market. This statement was the first sign of how regulators believed the process of ‘interoperability’ could move ahead. The new approach — published high-level in the joint letter — has been agreed by market authorities in conjunction with the European Commission. Although the main pan-European CCPs expressed their support for the proposed framework and their intention to work to establish a model that mitigates any additional risks likely to be introduced in compliance with the new requirements, there is still little sign of early consensus. The differences in thinking between firms are so ingrained that without the regulators taking a more prescriptive line there is a risk that interoperability is simply not going to happen. A new regulation, informally referred to as European Market Infrastructure Legislation (EMIL), is expected to materialise in 2010 and will enter into force in 2012. It is likely to regulate the way CCPs operate. CCP inter­operability for cash equities will potentially be included. In a recently published Discussion Paper, the European Commission said that a future legislative framework may need to take an explicit stance on some of the issues currently under consideration. This could include: the options for managing inter-CCP exposures that are currently under consideration; issues related to rehypothecation; and requesting that relevant competent authorities/ESMA determine whether the risk parameters of the CCPs are compatible with interoperability operating in a safe manner prior to coming into effect.