LCH.Clearnet and SIX X-Clear have published a series of guidelines for a successful interoperability framework. The Global Master Link Agreement aims to provide competitive clearing for trading venues who have requested such services. LCH.CLearnet and SIX X-Clear hold an existing interoperability arrangement to service the London Stock Exchange and SIX Swiss Exchange.
The Global Master Link Agreement covers the following points:
Contract formation on individual trades: To ensure that where a transaction arises on an agreed trading venue between members of the parties and each party registers a cleared contract with its member, a balance contract automatically arises between the two CCPs on the same terms to ensure that each party retains a balanced book.
Rejection of trades: Each party retains its ability under its own published rules to reject trades which do not meet its eligibility criteria. Therefore, where either party rejects a trade, each member leg of the transaction and the corresponding balance contract between the parties falls away to ensure that each CCP retains a balanced position.
Collateral and margin: The net position of each party with the other under balance contracts should be subject to margin calls and collateralisation requirements broadly equivalent to the requirements that the calling CCP would apply to its own members.
Collateral used must be free of all encumbrances.
Default fund: Neither party makes a contribution to the default fund of the other.
Default of a clearing member: The default of a member of one party does not affect the obligation of that party to perform under corresponding balance contracts with the other party. It is for each party to manage defaults of its own members. A member’s contract with its CCP therefore remain unaffected by the mere fact that the original counterparty to the trade (being the member of the other CCP) has defaulted.
Default of a CCP: A party can treat the other party as a defaulter in a limited but appropriate range of circumstances (including, most importantly, insolvency) and manage the defaulting partys open balance contract positions with it in accordance with the non-defaulting CCP’s own default rules.
Suspension of services: Each party can suspend its obligation to continue clearing new trades and becoming party to new balance contracts with the other party in a defined range of emergency and other situations so as to manage its ongoing risk exposure.
Liability: The arrangements incorporate appropriate limitations on the scope of liability of each party to the other (other than obligations under balance contracts, which are to be performed in full) to avoid unreasonable exposures.
European clearing houses have been calling for agreement on interoperability over recent months. EuroCCP published a white paper (found here) regarding the guidelines on interoperability In January 2010. Diana Chan, CEO of EuroCCP said: EuroCCP aims to make interoperability safer and easier. Collective action among CCPs and engagement with market participants and regulators is essential to delivering the benefits of interoperability.
EuroCCP has also been working towards interoperability agreements with LCH.Clearnet, SIX X-Clear and EMCF. But despite the move from European clearing houses to make clearing as competitive as the U.S, regulators have stalled progress due to concerns that all clearing houses could be connected indirectly through interoperability, increasing systemic risk.
In response, the EuroCCP paper stated that each clearing house should hold its own default fund, and Interoperability Convention should be established, to provide transparency of arrangements between interoperating CCPs, should replace confidential bilateral agreements.