Central counterparty clearing: constructing a framework for evaluation of risks and benefits
AbstractA Central Counterparty (CCP) is an entity that interposes itself between transacting counterparties – a seller vis-à-vis the original buyer and a buyer vis-à-vis the original seller – to guarantee execution of the transaction. Thus, the original transacting parties substitute their contractual relationships with each other with contracts with the CCP. Central Counterparty Clearing has become increasingly popular in Europe, not just in derivatives markets, where, due to the high risk involved, it has been common for decades, but also in equities markets. Within the European Union, the main factor motivating the increased sophistication in clearing arrangements is the ongoing process of European economic integration, ie the euro’s introduction, the ongoing organisation of an internal market for financial services and the corresponding objective of creating a pan-European financial infrastructure for payments and securities clearing and settlement. Central counterparty clearing houses exert a broad influence on the functioning of financial markets. They can increase the efficiency and stability of financial markets to the extent that their smooth functioning results in a more efficient use of collateral, lower operating costs and greater liquidity. As market players actively try to achieve economies of scale and scope with mergers and through harmonising their technical processes, they inevitably have had to focus on one of the most fragmented areas in Europe’s securities market infrastructure – clearing and settlement. Because of the importance of its role, a CCP must have sound risk management. The CCP assumes responsibility in the aggregate and reallocates risk among participants. Moreover, if the CCP fails to perform risk management well, it can increase risk in the markets. While the big market players dominate the current CCP market in Europe, it is not only the big players who can benefit from a functioning CCP. With the right structure, a CCP enables small players to stay in the market and makes it possible for issuers in a regional marketplace to achieve market funding. Indeed, this is the tendency currently seen in the newest EU member states – and one of the main arguments against the single European CCP model. Although, the purpose has been to leave CCP questions to market participants, regulatory, oversight and supervisory issues can drive the actions of market participants. Indeed, authorities must sometimes be actively involved in boosting a CCP project to keep their home markets competitive. This may well be the situation faced by the Nordic/Baltic market in the near future. Thus, this paper attempts to give a neutral evaluation of the risks and benefits related to the functionality of CCPs in integrating markets and construct a framework for possible future risk-benefit analysis in a Finnish/Nordic-Baltic clearing and settlement infrastructure that incorporates a CCP solution. This is an updated version of a Bank of Finland working paper (Financial Markets Department 01/04).
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 30/2004.
Length: 67 pages
Date of creation: 13 Oct 2004
Date of revision:
central counterparty clearing; clearing; settlement; securities markets; infrastructure; integration;
Find related papers by JEL classification:
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Schmiedel, Heiko & Malkamäki, Markku & Tarkka , Juha, 2002. "Economies of scale and technological development in securities depository and settlement systems," Research Discussion Papers 26/2002, Bank of Finland.
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- Kemppainen, Kari, 2003. "Competition and regulation in European retail payment systems," Research Discussion Papers 16/2003, Bank of Finland.
- Peter Gomber & Peter Rohr & Uwe Schweickert, 2008. "Sports betting as a new asset class—current market organization and options for development," Financial Markets and Portfolio Management, Springer, vol. 22(2), pages 169-192, June.
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