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Interoperability between central counterparties

Author

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  • Jürg Mägerle
  • Thomas Nellen

Abstract

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.

Suggested Citation

  • Jürg Mägerle & Thomas Nellen, . "Interoperability between central counterparties," Journal of Financial Market Infrastructures, Journal of Financial Market Infrastructures.
    • Handle: RePEc:rsk:journ7:2437958
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    Citations

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    Cited by:

    1. Stacey Anderson & Jean-Philippe Dion & Héctor Pérez Saiz, 2013. "To Link or Not To Link? Netting and Exposures Between Central Counterparties," Staff Working Papers 13-6, Bank of Canada.
    2. Ron Berndsen & Ronald Heijmans, 2017. "Risk indicators for financial market infrastructure: from high frequency transaction data to a traffic light signal," DNB Working Papers 557, Netherlands Central Bank, Research Department.
    3. Alexander, Carol & Kaeck, Andreas & Sumawong, Anannit, 2019. "A parsimonious parametric model for generating margin requirements for futures," European Journal of Operational Research, Elsevier, vol. 273(1), pages 31-43.
    4. Cyril Monnet & Thomas Nellen, 2021. "The Collateral Costs of Clearing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(5), pages 939-970, August.
    5. Xiaobing Feng & Haibo Hu, 2016. "CCP interoperability and system stability," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 27(03), pages 1-18, March.
    6. Berndsen, Ron, 2020. "Five Fundamental Questions on Central Counterparties," Discussion Paper 2020-028, Tilburg University, Center for Economic Research.
    7. Fuchun Li & Héctor Pérez Saiz, 2016. "Measuring Systemic Risk Across Financial Market Infrastructures," Staff Working Papers 16-10, Bank of Canada.
    8. Nathanael Cox & Nicholas Garvin & Gerard Kelly, 2013. "Central Counterparty Links and Clearing System Exposures," RBA Research Discussion Papers rdp2013-12, Reserve Bank of Australia.
    9. Darrell Duffie & Haoxiang Zhu, 2011. "Does a Central Clearing Counterparty Reduce Counterparty Risk?," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 1(1), pages 74-95.

    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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