Bulletin – June Quarter 2012 Central Counterparty Interoperability Abstract

Many securities and derivatives markets, including most that are traded on an exchange, are served by a central counterparty (CCP). After trades are executed, the CCP inserts itself between both trading counterparties, to protect them from the risk that one defaults before the obligations are settled. CCP interoperability is an arrangement that links different CCPs, allowing participants of one CCP to seamlessly deal with participants of another CCP. This can make it cheaper for traders to participate in a wider range of financial markets, and can facilitate competition between CCPs by opening up participant networks. However, interoperability also introduces financial stability risks, primarily by creating dependencies between the linked CCPs, and so it may be unsuitable for some markets. Interoperability arrangements are currently in place between some CCPs serving European equity markets, and another type of arrangement is in place linking several US CCPs. There are currently no links involving Australian CCPs, although the evolving CCP landscape may encourage links of some form in the future.

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