Interoperability between Central Counterparties. Impact on the distribution of capital consumption among Member firms

Central Counterparties (CCPs) are financial infrastructures designed to reduce counterparty risk. They do so by virtue of novation of trades, becoming the buyer to the seller and the seller to the buyer. CCPs manage the counterparty risk collecting Margins from its Members. Interoperability among CCPs allows those Members that maintain positions in several CCPs (like big investment banks or HFTs) to concentrate all their trades in one CCP. After an Interoperability arrangement is implemented, these Members can reduce their total exposure by netting long and short positions, thus enjoying a reduction in the Margins they have to post. But Interoperability reduces the Margins for some Members at the price of creating new risks for the whole system. These new risks have to be covered with Interoperability Margins, additional to the Position-related ones. As a consequence, Members with a below-average use of Interoperability – like local Banks or final investors – will suffer an increase in the Margins they have to post. Interoperability – which is compulsory in Europe by virtue of EMIR – implies a transfer of capital from local Banks and final investors to big Investment Banks and HFTs. The rationale for defending such a policy should be openly discussed: it is not easy to realize why capital in the hands of HFTs and big Investment Banks is preferable to capital in the hands of local Banks and buy-side firms.