Central counterparties and banks: vive la difference

Mark Jozsef Manning and David Hughes

Journal of Financial Market Infrastructures

Abstract: ABSTRACT Since the global financial crisis, central counterparties (CCPs) have assumed an;increasingly prominent role in the financial system. While regulatory standards for;CCPs have been strengthened in recent years, there remains considerable debate in;both industry and policy circles as to whether they are adequate to promote resilience.;In this debate, experience has often been drawn from bank regulation. To help ground;the debate, this paper draws out the essential differences between CCPs and banks,;comparing indicators of systemic importance and considering implications for the;regulatory approach. It argues that banks and CCPs may affect systemic stability in;different ways, with a CCP's systemic importance derived from that of its participants.;While size is an important indicator of a bank's systemic importance, a CCP's;central role in the financial network and its typical lack of substitutability are likely to;be more important. The paper demonstrates that, while continuous review and challenge;is important, any refinements to regulatory standards for CCPs to reflect lessons;drawn from bank regulation should not overlook these differences.

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