LCH.Clearnet, an independent clearing house, and SIX x-clear, the central counterparty (CCP) and licensed Swiss bank, have published a summary link agreement which provides the framework for successful interoperability across Europe. The existing interoperability arrangement between the clearing houses, which serves the London Stock Exchange (LSE) and SIX Swiss Exchange, uses this link agreement.
The agreement is based upon a proven model which successfully withstood the Lehman default. The model has been designed to minimise the risk of contagion by safeguarding the assets of the non-defaulting CCP and its members.
Key features include:
Integrity of risk management:
- Each CCP retains the authority to determine the eligibility of trades for clearing.
- Margining process preserves the integrity and safeguards of each CCP.
Protection from contagion in the event of a default:
- ‘Defaulter pays’ model ensures protection for non-defaulting CCP and its members.
- Distinct default funds minimises contagion in the event of a CCP default.
Urs Wieland, member of the executive committee and head of risk management at SIX x-clear, said: “SIX x-clear and LCH.Clearnet understand and support the market’s need for transparency. By publishing all major contents of our inter-CCP contract, SIX x-clear and LCH.Clearnet remain committed to championing the needs of our clients by providing safe, secure and transparent interoperable CCP links. CCPs should never compete on risk and when interoperability is implemented correctly, risk is not compromised. The introduction of competitive clearing for UK equities on the LSE caused no market disruption and showed the true benefits of the system – move to your favoured clearer immediately or simply stay with the incumbent, all the while experiencing no disruption.”
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