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Interoperability: Is it worth the effort?

Wednesday 12 May 2010 - by Diana Chan


There is still work to do to ensure that interoperability is also safe and scalable, both to the volume of trades and to the number of interoperating CCPs. Once the pipes are unblocked by interoperability, friction will be removed from cross-border trading in the EU, investment will flow freely, liquidity will increase, and trading volumes will grow to befit the size of the European economy. Issuers and investors will ultimately benefit from interoperability.

What is a CCP?
A CCP (central counterparty) is a company that provides the guarantee to both the buyer and seller in a trade that if one party defaulted, the CCP would fulfil the financial obligations to the remaining party as agreed at the time of the trade. A CCP mitigates replacement cost risk or market risk ie. the risk that the remaining party has to replace the trade at an unfavourable price.

A CCP adds the most value when there is a high counterparty risk and when there is a high market risk, such as the possibility that the price would have moved unfavourably when a trade has to be replaced.

How does interoperability between CCPs work?



Interoperability between CCPs is an arrangement whereby each CCP, representing one party to the same trade, ensures that it does not suffer a loss due to the other CCP’s default and that it remains capable of meeting the obligations to its own customer. When firms are free to choose CCPs, two trading parties might have selected a different CCP. Each CCP provides the guarantee to its own customer. If one CCP defaults, the remaining CCP would still need to make good the trade to its own customer.


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