In an article commemorating the 20th anniversary of SIX’s Swiss CCP, SIX x-clear, head of clearing products Michael Gort takes a look at the history and future of interoperability in clearing. Pure interoperability appears to be unlikely in the current market environment, he claims. Instead, a “preferred” model is what market participants appear to be embracing.
Michael Gort begins his piece by recalling the beginnings of interoperability, which are rooted in the establishment of multilateral trading facilities (MTFs) in the early 2010s. “They encountered a challenge: settling the same instrument multiple times and providing collateral to each connected CCP,” he writes. This highlighted the need for a more streamlined process, hence interoperability.
More than a decade on, interoperability has created a competitive clearing landscape, resulting in reduced CCP memberships, lower margin requirements, and a decrease in transaction fees, among many other benefits. Yet, despite these advantages, Michael Gort says that there has been a slowdown in the adoption of the interoperability model across Europe in recent years. He attributes it not to waning interest, but to an unwillingness of trading venues and exchange groups to open up.
However, he believes that attitudes may be shifting as exchanges are now recognising that an enhanced post-trade model is what is required to boost their attractiveness compared to their competitors, the MTFs.
Michael Gort suggests that the “preferred interoperable clearing model” introduced in 2011 by BATS Europe, then a prominent MTF, may be the answer. It “involved three interoperable CCPs in addition to the incumbent CCP that was not obligated to interoperate,” he explains. ”The trade execution would be cleared by the designated CCP(s) only if both counterparties selected one of the interoperable CCPs as their preferred choice. Alternatively, if no interoperable CCP was chosen, the trade would, by default, be cleared by the incumbent CCP.”
The model would offer the following benefits:
• Smaller local participants that trade mainly on the primary market may continue to use the incumbent CCP that they are accustomed to.
• Fragmentation is reduced.
• Increased competition is fostered, providing participants with a real choice between CCPs and clearing models that best support their operations.