The challenges of derivatives central counterparty interoperability arrangements

John McPartland and Rebecca Lewis

Journal of Financial Market Infrastructures

Abstract: ABSTRACT It has been posited that, because central counterparties (CCPs) that clear European;securities have established successful interoperability arrangements, European CCPs;that clear derivatives contracts should be required to enter into similar interoperability;arrangements. (Technically, market participants exchange the "interest" in the equity;security that the relevant European Central Securities Depository has in the equity;security that it holds. That being said, these "interests" are nonetheless exchange;traded, cleared and settled as though they were the actual underlying security.) The;premise is that doing so would potentially foster competition among derivatives CCPs;and, ideally, tend to weaken the one-to-one relationship between a derivatives trading;venue and its exclusive CCP. This paper challenges the plausibility of this premise on;its daunting operational challenges, rather than from a public policy perspective.

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