The clearing companies, LCH.Clearnet and SIX x-clear, the Central Counterparty (CCP) and licensed Swiss bank, have published a summary link agreement which they say provides the framework for successful interoperability across Europe. The two firms were earlier involved in a wrangle over accessibility to the London Stock Exchange (LSE) in accordance with the EC Code of Conduct and the EU drive to increase competition in the post-trade space, as has already happened in the exchanges arena. This new link agreement builds upon the LSE deal and should form the basis for future Europe-wide co-operation.

According to LCH.Clearnet and SIX x-clear the interoperability agreement between the two, which can be viewed HERE, will enable the provision of competitive clearing for trading venues that have requested such services and can be easily extended to cover additional trading venues without much effort. As the clearing space opens up under pressure from the EU and greater competition and harmonisation drives, this ability to use the framework to more easily provide interoperability will be crucial. Without it, regulatory action may be taken by legislators. The transformative pressures in the clearing and settlement sector were already evident last year in the intense ownership battle that raged last year for control of LCH.Clearnet, involving the DTCC, ICAP and many others. It seems that the changes evident in the exchanges space, with the launch of numerous new multilateral trading facilities (MTFs) and the smashing of old monopolies, is now travelling down the line to the clearing arena. Interoperability is just one manifestation of this trend.

The framework agreement model has been designed to minimise the risk of contagion by safeguarding the assets of the non-defaulting CCP and its members, say the two clearing firms. Key features cover the integrity of risk management - i.e.
• Each CCP retains the authority to determine the eligibility of trades for clearing
• Margining process preserves the integrity and safeguards of each CCP.

In terms of providing protection from contagion in the event of a default the rules are that:
• The 'defaulter pays' model ensures protection for non-defaulting CCP and its members
• Distinct default funds minimises contagion in the event of a CCP default.

Commenting on the formulation of their interoperable deal, Wayne Eagle, director of equity services, LCH.Clearnet, said: "LCH.Clearnet and SIX x-clear already have a proven model that has withstood the largest default in history (i.e. Lehman Brothers). This event demonstrated that interoperability can be safe and secure so long as the structure preserves the integrity of the CCPs and minimises contagion in the event of a default through securely ring-fencing the surviving CCP and its members. [Our agreement does this]."

Urs Wieland, a 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 the major contents of our inter-CCP contract now, we prove our commitment 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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