Is a CCP right for your market?

The increasing focus on the use of Central Counterparties (CCPs) to manage risk in financial markets has led many markets to ask themselves whether they need a CCP. Is it a more appropriate way to manage risks than the mechanisms they are using already? What do they need to do to set up a CCP?

To help markets address these questions, the Africa and Middle East Depositories Association (AMEDA) organised a one-day workshop for CSDs, hosted by the Abu Dhabi Exchange. Hugh Simpson of Bourse Consult presented this together with Stuart Turner, Founder of Avenir Technology (and a former Partner of Bourse Consult).FullSizeRender

There were two important themes in the workshop.

First, there are many different post-trade risks in financial markets and many different mechanisms for managing them. For a market that only trades cash securities on an exchange with low volumes, a CCP may be unnecessarily complex; the simple guarantee funds used in many developing markets may be perfectly adequate. However, once derivatives are introduced, volumes increase or markets become more complex, a CCP starts to become the most attractive solution. It can help to open a market to international investors, as a CCP is a familiar, trusted concept.

A CCP may also have a key role in supporting the market structure: if an electronic trading platform requires pre-trade anonymity, then it also requires post-trade anonymity, but it is very difficult to do this without a CCP to take on the credit risk between two parties who do not know each other.

Second, building a CCP is not just an IT project. A CCP requires many different building blocks to be successful: the legal and regulatory framework; its relations with other financial institutions, such as trading platforms, CSDs, payment systems and clearing members; risk management policies; financial resources and skilled people as well as IT systems. Building a CCP requires a programme that brings all the different components together.

The slides used at the workshop are available on the AMEDA website.

Hugh Simpson will be very happy to follow up any enquiries on this topic.