Interoperability between central counterparties

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.