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CCP interoperability arrangements: ETD 1, OTC 0

On 1 July 2015, ESMA published a Final report on the extension of the scope of interoperability arrangements, from transferable securities and money-market instruments to derivatives.

Under interoperability arrangements, two or more CCPs offer a cross-system execution of transactions. Current arrangements exist for EU equities, EU government bonds and Exchange Traded Derivatives.

Title V of EMIR on interoperability arrangements aims to encourage such arrangements by striking a balance between fair and open access between CCPs and risk management. A request from one CCP to another to put in place such an arrangement may only be denied if specific risk concerns are identified. Certain rules apply to Risk management, Provisions of margins among CCPs and Approval of interoperability arrangements by the competent authorities.

In the Final report, ESMA recommends extending the EMIR provisions on interoperability arrangements to Exchange Traded Derivatives (ETDs), but not to Over the Counter Derivatives (OTCs). Pointing to Recital 73 of EMIR, ESMA concludes that “interoperability on derivatives, all the more OTC ones, is more complex, counterparty credit risk plays a more prominent role and thus this required more time to decide on.”

A further extension of Title V of EMIR to OTC derivatives may be assessed at a later stage, perhaps when CCPs start showing an appetite to establish interoperability arrangements for OTC derivatives.

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