Access to Central Clearing Services

for Over-the-Counter Derivatives

Joshua Slive, Carolyn Wilkins and Jonathan Witmer

Introduction Broad access to central clearing will be necessary to fully

realize the expected benefits of systemic-risk reduction
The recent financial crisis revealed several weaknesses from the increased use of CCPs. The evolving configura-
in the global financial system, one of the most important tion of access to CCPs may, however, have unintended
being the high degree of interconnectedness among consequences for the structure of the global OTC deriva-
market participants and a lack of transparency regarding tives market. As the use of CCPs is mandated or strongly
the associated counterparty exposures. The failure of encouraged and thus becomes widespread, access
Lehman Brothers in 2008, for example, caused shocks requirements could have important implications for market
to cascade through the market for credit default swaps, innovation, concentration, competition and the resilience
severely disrupting that market and placing many other of local financial markets. For example, requirements
financial institutions at risk. In contrast, markets that were that limit access based on size considerations could help
backed by a sound central clearing infrastructure to help to perpetuate and expand the dominance of very large
mitigate and manage counterparty risk performed much dealers. They could also reduce the ability of local markets
better through the crisis. Exchange-traded products and to withstand financial shocks. The importance of achieving
interest rate swaps, for example, were less disrupted by fair and open access to CCPs has been recognized by
the Lehman default.1 the Financial Stability Board (FSB) Working Group on
OTC Derivatives (FSB 2010), as well as other international
In this context, the G-20 committed to reduce risks to groups.3 According to CPSS-IOSCO (2011),
the global financial system by having all standardized
over-the-counter (OTC) derivatives contracts cleared by Fair and open access to [financial market infra-
central counterparties (CCPs) by the end of 2012. The use structure] services encourages competition among
of CCPs with proper risk-management controls reduces market participants and promotes efficient and
systemic risk by centralizing counterparty risk—thereby low-cost clearing and settlement. . . . participation
making its management more uniform and transparent— requirements should therefore encourage broad
and by lowering system-wide exposures to counterparty access, including access by participants, other
risk through multilateral netting and risk mutualization. market infrastructures, and where relevant service
As a result, greater use of CCPs should reduce uncer- providers, in all relevant jurisdictions, based on
tainty regarding exposures and the likelihood that a reasonable risk-related participation requirements.
default will propagate across the network of major market Access to CCPs is of particular concern to countries like
participants.2 Canada that are not home to the important global CCPs.4
Unlike some of these countries, Canada has large dealers

1 The contagion channels between dealers are explained in Duffie

(2010a). Norman (2011), Monnet (2010) and CCP12 (2009) discuss 3 Among them are the Committee on the Global Financial System
how central counterparties helped protect some markets during the (CGFS), the Committee on Payment and Settlement Systems (CPSS),
Lehman default. the International Organization of Securities Commissions (IOSCO)
2 A thorough account of the benefits of CCPs is provided in FSB and the OTC Derivatives Regulators Forum (ODRF).
(2010); Brunnermeier (2009); Duffie, Li and Lubke (2010); Kiff et al. 4 For an overview of reforms undertaken in OTC derivatives markets in
(2010); and Chande, Labelle and Tuer (2010). Canada, see Wilkins and Woodman (2010).

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JUNE 2011 39
that can access global CCPs, and many products of Smaller jurisdictions are particularly affected, since they
importance to the Canadian market are already cleared tend to have mid-sized and smaller firms dealing heavily
through global CCPs. But global CCPs may not provide in derivatives denominated in the local currency. Chart 1
a level playing field to Canadian dealers that are smaller shows that market participants who are not among the
than the global dealers and that face additional challenges largest 14 derivatives dealers (the G14) are very active
from cross-jurisdictional access to clearing. In addition, in interest rate swaps (IRS) outside the four most-traded
offshore clearing may not provide the public sector with currencies.7 For Canadian-dollar IRS, over 60 per cent of
sufficient scope for oversight or control to mitigate and G14 dealers’ transactions involve non-G14 counterparties.8
manage the effects of a financial crisis. Moreover, 55 per cent of OTC transactions in Canadian
IRS involve a Canadian bank on at least one side of the
This report describes the challenges of achieving fair and
transaction (Chart 2).
open access to CCP services for OTC derivatives, as well
as the potential effects of limited access for the resilience
of financial markets and financial system stability. It then Chart 1: Excluding the four most-traded currencies,
the majority of IRS trades include participation from
presents two strategies for addressing the consequences
non-G14 dealers
of restricted access to CCPs for systemic risk. The first
Share of the notional amount outstanding of G14 dealers’ transactions with
strategy would require global CCPs to create access non-G14 counterparties
requirements that are proportional to risk. The second is
to establish domestic CCPs that are appropriately aligned indonesian rupiah
Saudi riyal
to market conditions and risks in different jurisdictions. russian ruble
chinese renminbi
Commensurate with these initiatives is a need to develop turkish lira
principles and a framework for co-operation in oversight Brazilian real
indian rupee
arrangements, as well as for liquidity provision and failure mexican peso
South Korean won
resolution for CCPs. South african rand
canadian dollar
australian dollar
British pound
Access Challenges at Global CCPs Japanese yen
U .S . dollar
Four most-traded
currencies
euro
A market participant can clear transactions at a CCP in % 0 10 20 30 40 50 60 70 80 90

one of two ways: either by becoming a direct clearing note: currencies are ordered on the y-axis from the smallest to the largest
member of the CCP, or by clearing indirectly, as a client of notional amounts outstanding of otc derivatives .
a direct clearing member. Each method poses potential Source: trioptima Last observation: 25 February 2011

challenges for mid-tier financial institutions or for those

that are not based in the CCP’s home jurisdiction.5 Chart 2: The Big Six banks participate in more than half of
Canadian-dollar IRS trades
can$-denominated irS notionals
Active participants in OTC derivatives markets
may be unable to obtain cost-effective direct Can$ billions
membership in global CCPs as currently Approximately $5.6 trillion 6000
structured Approx. 45 per 5000
cent of trades
Currently, the criteria for direct membership in existing
do not involve 4000
global CCPs for OTC derivatives are based principally Big Six banks.
on the size of the institution, as well as the volume and 3000
breadth of its OTC derivatives activities. These criteria Approx. 55 per
cent of trades 2000
can result in the exclusion of mid-tier global institutions involve Big
(because they do not meet size requirements) and institu- Six banks on at 1000
tions that specialize in particular products, geographic least one side.
0
areas or client types (because they cannot participate in
$0.9 trillion
default management for market segments where they have Big Six bank to big six bank Big Six bank to international banks

no expertise), even though these institutions may be of Big Six bank to other trades not involving Big Six banks
counterparties
extremely high quality and pose very low risk to the CCP
and other clearing members.6 Sources: canadian market infrastructure committee (october 2010)
and BiS triennial Survey (June 2010) Last observation: 31 october 2010

5 While CCPs exist in many countries, the dominant CCPs for OTC de-
rivatives are currently based in the United States (ICE Trust, CME) and 7 The G14 consists of Bank of America Merrill Lynch, Barclays Capital,
the United Kingdom (LCH.Clearnet SwapClear, ICE Clear Europe). BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman
6 A recent proposal by the United States Commodity Futures Trading Sachs, HSBC, J.P. Morgan, Morgan Stanley, Royal Bank of Scotland,
Commission would restrict the minimum capital requirement to Société Générale, UBS and Wells Fargo.
$50 million or lower and prevent CCPs from excluding non-dealers 8 We thank Mark Chambers of the Reserve Bank of Australia for sug-
as members. gesting that we look at these data.

40 REPORTS
BANK OF CANADA FINANCIAL SYSTEM REVIEW JUNE 2011
Several of the largest Canadian banks qualify to be direct Indirect clearers will get the same low charges only
members of LCH.Clearnet’s SwapClear, and some are under certain conditions.12 If they are unable to meet
already members.9 But even where Canadian banks are these conditions, indirect clearers will not obtain this
able to become direct clearers at a global CCP, the fee capital relief, although they will avoid capital charges on
structures may put them at a competitive disadvantage. default-fund contributions.
Existing CCPs for OTC derivatives sometimes offer impor- • Higher demands for posting margin/collateral: The
tant volume discounts or put ceilings on fees, in effect requirements for posting margins for indirect clearers
charging proportionally lower fees to larger clearers. In are set by their direct clearing members and are typi-
some cases, volume discounts may be an appropriate cally higher than the margins charged by the CCP for
response to the cost structure of the CCP. But fees direct clearing. The additional margin charges are nec-
that are designed to cover risks that are proportional to essary to mitigate the increased risks associated with
clearing activity should also be proportional; for example, indirect clearing.
placing a ceiling on contributions to a default fund allows
• Exposure to the market power of the direct clearer: A
larger clearers to take on more risk without fully paying
direct clearer controls its fees and margins to protect
their way.
itself from the default risk of its indirect clearers; it could
In addition to the access issues described above, there use this power to gain a competitive advantage over
are several challenges associated with cross-jurisdictional an indirect clearer that is also a competitor.13 Indirect
access to central clearing. CCPs may impose additional clearers may also perceive a risk that their direct
haircuts on offshore collateral and charge an extra initial clearer, who might be their competitor, could ben-
margin to control for the liquidity risk of smaller curren- efit from access to information on their clearing flow,
cies.10 While this may be justified from a risk-management despite internal measures (e.g., governance) to reduce
perspective, it could result in additional costs and risks the risk of this happening. The degree of market power
for Canadian market participants using offshore CCPs, depends on how much competition exists between
which could hinder the liquidity of Canadian financial direct clearers for indirect business and how easy it is
markets. Offshore clearing could also create challenges for an indirect clearer to switch to another direct clearer.
for the public sector in establishing adequate oversight
and in configuring emergency liquidity and resolution
procedures. Consequences of Limited Access
The existence of global systemically
Indirect access may not be the preferred important financial institutions may be
solution for mid-tier market participants reinforced by limited access to CCPs
As with most clearing and settlement systems, indirect The G-20 reform agenda for OTC derivatives can poten-
clearing is an option for institutions that do not qualify as tially reduce the dominance of very large market partici-
direct clearing members. Smaller institutions may prefer pants by promoting standardization, transparency and
indirect clearing, since they can avoid the large fixed costs electronic trading. Broader use of CCPs could further
associated with direct membership, including operational level the playing field in OTC derivatives, because CCPs
costs and contributions to a default fund. (They will still reduce the need to monitor the default risk of each coun-
pay a proportional share of these costs through clearing terparty. But mandating central clearing in a setting where
fees imposed by their direct clearers.)11 But indirect cost-effective direct access to CCPs is limited to the
clearers of OTC derivatives may face additional costs that largest dealers may transform a market that was tiered
could put them at a competitive disadvantage relative to for economic reasons into one where tiering is reinforced
direct clearers: by the structure of international regulation and market
• Higher capital charges: Transactions cleared directly infrastructure.14 This new market structure may reflect,
with CCPs that meet CPSS-IOSCO standards will face
lower regulatory capital charges than bilateral trades. 12 The rules proposed by the Basel Committee on Banking Supervision
will extend reduced capital charges to an indirect clearer if “(i) any
assets of the non-member bank related to such trade are segregated
and bankruptcy remote from the clearing member; and (ii) the non-
member bank is legally ensured that another CCP member will take
9 SwapClear is the current market leader in IRS and clears swaps in over such trade if the original clearing member counterparty cannot
14 currencies, including Canadian-dollar swaps out to 30 years. perform” (BCBS 2010). Current indirect clearing set-ups do not meet
10 There are also legal risks associated with uncertainty over the finality the second requirement.
and irrevocability of payments, bankruptcy resolution and rights over 13 Lai, Chande and O’Connor (2006), for example, construct a model to
collateral, given the possibility of conflicting laws across jurisdictions. examine a direct clearing member’s incentives to gain a competitive
11 Chapman, Chiu and Molico (2008) show that small players might not advantage over its indirect clearers in the market for retail payment
want to pay the direct participant costs, and may be extended only services.
limited credit by other participants in the settlement system, since 14 Harris (2006) discusses the unintended consequences on competi-
they do not have sufficient reputation to join. tion of regulation in the futures market.

BANK OF CANADA FINANCIAL SYSTEM REVIEW

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JUNE 2011 41
in part, the considerable influence wielded by the largest members are likely to tighten their requirements for client
global dealers over the rules of CCPs for OTC derivatives clearing and may also favour firms with which they have
through ownership, control of the risk committee and their broader and more direct relationships.16
market power in the purchase of CCP services.15
While the move to central clearing will reduce the inter- High costs of clearing may discourage
connectedness of global systemically important financial central clearing and reduce activity in
institutions (G-SIFIs), their systemic importance could standardized OTC derivatives
increase in a system that has limited access to CCPs, with Costs of clearing services in the form of direct costs or
significant unintended consequences: collateral requirements that are too high can have two
• A CCP that has only G-SIFI members as participants adverse effects.17 They may encourage market partici-
may be less able to handle a major systemic shock than pants to retain bilateral clearing practices, where feasible,
a CCP that has a wide and diversified membership. possibly through greater use of non-standardized prod-
Mid-tier institutions with expertise in certain market ucts that are not eligible for central clearing. If bilateral
segments could provide valuable risk- and default- clearing is not possible, high clearing costs can reduce the
management capacity without needing to participate in use of OTC derivatives. While it may be appropriate to limit
all segments of default management (Duffie 2010b). the use of derivatives to the extent that systemic risk in
the market is not adequately controlled, restricted use of
• G-SIFIs may gain market shares in other business
OTC derivatives can also reduce risk hedging, which can
lines if they have preferential access to CCPs. This is
expose firms and the economy to more risk.
because a lower cost of clearing OTC derivatives trans-
actions may yield advantages in other business lines,
such as bond underwriting and structured finance. Elements of an Effective Solution
These advantages could translate into advantages in
the market for customized, bilaterally cleared deriva- An effective strategy to mitigate the risk of unintended
tives, as well as other markets. For example, OTC deriv- consequences arising from restricted access to CCPs
atives are frequently used to hedge positions in bond must also include strong risk controls for CCPs, give finan-
markets, minimize funding costs using IRS and protect cial authorities the tools to manage extreme shocks, and
a loan portfolio using credit default swaps. support a robust and efficient market in OTC derivatives.
• Reduced contestability of markets may weaken market One element of the solution is to improve direct access by
resilience. If there are fewer direct participants, the recognizing the ability of high-quality mid-tier market par-
failure of any of them will be more important in terms ticipants to safely participate in direct clearing in propor-
of its impact on market liquidity. This could undermine tion to their risk characteristics. A second element could
the resilience of the market and increase the oppor- be to manage risks in local markets using local CCPs.
tunity for systemic shocks to propagate. If mandated
clearing under current access models reinforces the Proportional access for mid-tier participants
market dominance of G-SIFIs more generally, the risk
that shocks to a single institution will have widespread To establish appropriate access conditions, it is important
effects on markets will be increased. to develop access criteria that most effectively control risk
at the CCP while protecting the stability and efficiency
Mid-tier institutions may become more of the financial system. In place of measures of absolute
vulnerable in times of stress size currently used by many CCPs, one strategy is to set
access criteria and risk-management controls that are
Relative to global dealers, some Canadian institutions may proportional to the risk profile of the clearing performed by
face increased costs as indirect clearers, while the largest each member.18
Canadian dealers may face additional costs as direct
clearers. Although these costs may be small in normal
16 ��������������������������������������������������������������������
As the recent crisis demonstrated, at times of market stress, finan-
times, margin requirements can increase dramatically in cial institutions tend to reduce client services, requiring them to take
periods of stress, and the costs of supplying collateral may balance-sheet risk.
simultaneously climb. Market participants that depend on 17 See Singh (2010) for a discussion of the potential collateral implica-
others for clearing services may find those services more tions resulting from an increased central clearing of OTC derivatives.
difficult to obtain, decreasing liquidity and potentially con- 18 CPSS-IOSCO (2011) suggests that “Where necessary, an FMI
[financial market infrastructure such as a CCP] can establish less
tributing to increased procyclicality (CGFS 2010). Clearing restrictive participation requirements in conjunction with appropriate
risk-management controls. . . . Requirements should also reflect the
risk profile of the activity; an FMI may have different categories of
15 G14 dealers control the ownership of SwapClear (the dominant participation based on the type of activity. For example, a participant
clearer of IRS) and the ICE risk committee (the dominant clearer of in the clearing services of a CCP may be subject to a different set
credit default swaps), and had substantial influence over the initial of requirements than a participant in the auctioning process of the
configuration of the CME Group’s IRS clearing. same CCP.”

42 REPORTS
BANK OF CANADA FINANCIAL SYSTEM REVIEW JUNE 2011
Membership criteria should be configured to enhance the CCPs, or are seriously considering doing so.19 In part,
CCP’s ability to manage the default of one or more of its this is a response to the difficulty of reconfiguring access
members. The criteria should aim to include institutions criteria for global CCPs. It is also consistent with related
that can aid in managing defaults, and should exclude policy objectives that include simplified and direct over-
institutions that are more likely to default. By expanding sight of systemically important financial infrastructure for
membership to include high-quality medium-sized insti- local currency markets, as well as an ability to directly
tutions, a CCP may increase the number of institutions manage policies for liquidity provision and failure resolu-
that could bid for the failing member’s positions, thereby tion. It may be possible to configure shared arrangements
increasing its total capacity for default management for oversight where officials from several jurisdictions
(Duffie 2010b). co-operate to supervise a global CCP,20 but a local CCP
allows each jurisdiction direct control regarding regulation
Moreover, direct participation of local market participants
and oversight, as well as crisis management.
whose credit is of high quality may be a source of strength
for a CCP, particularly if they can offer market-making and A stand-alone Canadian CCP may be able to protect
pricing expertise in certain local products. For example, Canadian markets from some global shocks, such as the
in the case of the default of a member with an impor- default of a large offshore dealer or of an offshore CCP.
tant Canadian-dollar portfolio, Canadian institutions as While complete protection is not possible, owing to the
direct clearers at the CCP may be best placed to manage many risk-propagation channels present in the global
the replacement of the portfolio and the liquidation of financial system, a decentralized structure for CCPs may
Canadian-dollar collateral. Canadian institutions would reduce the risk inherent in concentrating the provision of
also be in a better position to monitor Canadian indirect market services in a small number of large entities.21 There
clearers, since they would quite possibly already be moni- is, however, less effective risk mutualization and netting
toring the same clients in other areas of their business. in a local CCP. With narrow participation, a Canadian
CCP would have fewer resources to absorb the default
While it is beneficial to have a larger pool of members to
of a participant and would need to impose higher costs
aid in handling defaults, difficulties can arise when some
on its participants to compensate. Attracting the broad
members lack the operational capabilities to quickly price,
participation of global dealers would mitigate some of the
buy and sell large defaulted portfolios in stressed market
adverse effects of narrow participation.
conditions. Although the increased use of electronic
trading platforms should ease these difficulties some- Greater knowledge of Canadian market conditions may
what, solving the difficulties may require modifications to a allow a local CCP to adapt its risk-management prac-
CCP’s procedures for handling defaults. For example: tices to the Canadian market, thereby achieving more
open access without increasing risk. This may allow
• Direct membership could be tiered to allow some mem-
more Canadian market participants to gain low-cost
bers to play a less important role in the default process in
access to clearing services, which could promote liquidity
exchange for larger default-fund or margin contributions.
in Canadian financial markets. Better integration into
• Parts of the default-management process (e.g., the Canadian financial markets may also allow a Canadian
responsibility to bid on the defaulting member’s port- CCP to better configure netting across certain asset
folio) could be partially or fully outsourced to sophisti- classes, reducing collateral demands for participants.
cated market participants.
A Canadian CCP may, however, impose substantial
• Default management could be partitioned to allow
increased costs on Canadian clearers and reduce market
each clearing member to participate for the products in
efficiency if it reduces access to foreign counterparties
which it has the most expertise. If such partitioning is
and multilateral netting opportunities. If Canadian market
not possible in a global CCP, it could be accomplished
participants are forced to divide their derivatives portfolios
by setting up local CCPs (see next section).
among multiple CCPs, this will likely decrease their ability
Each of these modifications entails its own set of risks. to net positions against each other. They will therefore
For example, outsourced default management may be less
reliable in highly stressed situations, and partitioning may
complicate and delay the process of hedging and replacing 19 Singapore, Hong Kong, Poland, Brazil, India, Japan and China all
defaulted portfolios. It is important to determine the appro- plan to have domestic CCPs for OTC derivatives. Other countries are
investigating this option. Only a few global CCPs currently have sig-
priate configuration of access criteria to ensure that the nificant clearing volumes in OTC derivatives, so it is not yet apparent
benefits of fair and open access outweigh the risks. how successful the local CCPs will be.
20 For example, Canada and other jurisdictions share oversight of the
CLS foreign exchange clearing system under the leadership of the
Local CCPs Federal Reserve Bank of New York. Oversight of a CCP may, how-
ever, be substantially more complicated.
Despite the existence of global CCPs for many OTC
21 The Joint Regulatory Authorities of LCH.Clearnet Group (2008) also
derivatives products, some jurisdictions have already recognized the potential for multiple linked CCPs to decrease the risk
responded to the G-20 commitments by creating local arising from “a CCP being a single point of failure.”

BANK OF CANADA FINANCIAL SYSTEM REVIEW

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JUNE 2011 43
 Box 1

Links Between CCPs and Cross-Margining Agreements

Linking arrangements, including peer-to-peer links and Cross-margining agreements between CCPs allow for
cross-margining agreements, are used by local CCPs to the joint margining of transactions in designated products.
improve collateral efficiencies. Common clearing members are thus able to net expo-
sures with offsetting risk characteristics across CCPs for
Peer-to-peer links allow two CCPs to connect as equals
the purposes of calculating margin requirements.
and to co-operate to clear trades where one counterparty
clears through each CCP. Some harmonization of risk Links introduce numerous legal and operational risks to
management and operational requirements is necessary the clearing system, especially as the number of links
to effectively manage risks associated with trades cleared between CCPs increases. The CPSS-IOSCO principles
across the link. Consistent with the proposed CPSS- will require that additional capital be available to mitigate
IOSCO standards, the CCPs would have to hold addi- the increased risks from links. This will make clearing over
tional financial resources to protect themselves from their links more expensive, depending on the nature of the
exposures to each other. trades through such arrangements.

be forced to supply more margin collateral and may also markets and enhance the transparency of exposures
choose to stop transacting in certain market segments or arising from derivatives trades. The CCP infrastructure
with certain counterparties. To improve collateral efficien- should be configured in the best interests of Canadian
cies, a local CCP could, over time, develop cross-mar- financial markets and institutions. It should provide the
gining or linking agreements with other CCPs (see Box 1). most effective policy tools to constrain the spread of a
financial crisis, reduce the effects of externally or internally
From a global perspective, a model where local CCPs are
generated systemic shocks on the Canadian market, and
linked to each other or to global CCPs provides a potential
support the liquidity and efficiency of Canadian financial
middle ground that could combine some of the advan-
markets.
tages of local CCPs and global CCPs and permit broad
access to the widest range of derivatives. In general, Considerable progress has already been made by inter-
links provide a way of reducing collateral demands for a national organizations such as the FSB, CPSS, IOSCO,
local CCP through increased netting efficiency, while still CGFS and ODRF on issues related to OTC derivatives
permitting some local control. In terms of the benefits of CCPs. This report suggests two strategies for addressing
risk mutualization and protection (insulation) from global the potential unintended consequences of restricted
shocks, a linked system may be at least as resilient as a access to CCPs:
small set of global CCPs or a large number of stand-alone
CCPs could develop policies and membership
local CCPs.22 But links also require that both the CCPs, as
requirements that are proportional to risk. This could
well as their respective regulators, agree on the terms and
expand access to central clearing, deepen the risk-
nature of the link. The arrangements will need to include
absorbing capabilities of CCPs, increase the liquidity and
appropriate risk controls to mitigate the additional risks
efficiency of OTC derivatives markets, and reduce the
that links introduce to the financial system, especially as
impact of the failure of a large global dealer.
the number of links between CCPs increases. At an inter-
national level, regulators are focused on links in cash mar- A Canadian CCP that is better aligned to Canadian
kets. It is uncertain whether links will be a viable option for market conditions and risks could be developed. Such
CCPs for OTC derivatives in the short term. a CCP could provide simplified and direct oversight of sys-
temically important financial infrastructure for Canadian-
Conclusion dollar OTC derivatives, particularly for Canadian-dollar
interest rate derivatives. It could also provide Canadian
The G-20 countries, including Canada, have committed to authorities with the ability to directly manage policies for
increasing the central clearing of OTC derivatives transac- liquidity provision and failure resolution. The broad partici-
tions using CCPs in order to support financial stability; in pation of global dealers or links between CCPs is critical
particular, CCPs will reduce contagion arising from the to achieving the net benefits of a local CCP by preventing
interconnectedness of participants in OTC derivatives this decentralized approach from fragmenting market
liquidity and the management of systemic risk.
22 The optimal central clearing solution, in terms of resilience, depends In addition, co-operative oversight is essential to provide
on several factors, such as the degree of integration of the partici-
pants in each jurisdiction and the type and magnitude of the shocks the foundations for safely expanding access to CCPs and
(Renault 2010; Zigrand 2010). establishing links between CCPs. To deal with shocks that

44 REPORTS
BANK OF CANADA FINANCIAL SYSTEM REVIEW JUNE 2011
a CCP cannot properly manage, co-operative policies Duffie, D., A. Li and T. Lubke. 2010. “Policy Perspectives
are also required for emergency liquidity provision and, in on OTC Derivatives Market Infrastructure.” Federal
extreme circumstances, failure resolution. Reserve Bank of New York Staff Report No. 424.
Canadian federal and provincial authorities are working Financial Stability Board (FSB). 2010. “Implementing OTC
with their international counterparts to promote broader Derivatives Market Reforms.” 25 October.
access to central clearing and links between CCPs under ———. 2011. “Progress in the Implementation of the
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derivatives transactions will reinforce the safety and effi- Harris, L. 2006. “Breaking the Futures Monopoly.” Forbes
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Joint Regulatory Authorities of LCH.Clearnet Group. 2008.
“Investigation of Risks Arising from the Emergence of
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