How Interoperability Works

The core of an interoperability arrangement is how two CCPs manage and mitigate their exposure to each other, in the event that one CCP defaults on its obligations to the other.

1. Trades to be cleared are captured by the stock exchanges or multilateral trading facilities where the trades are executed. The trade feeds are given to CCPs which have clearing arrangements in place with the venue.

2. Each CCP becomes the legal counterparty for its own customers (“Participants”) through novation (or its legally equivalent process). Each CCP calculates and collects margin from its Participants so that if the Participant defaults on its obligations, the CCP will use the collected collateral to cover any losses it might incur.

3. The CCPs become the legal counterparty to each other. Each CCP calculates and collects margin from the other CCP so that if the interoperating CCP defaults on its obligations, the surviving CCP will use the collected collateral to cover any losses it may incur. It will also retrieve the collateral it has provided to the defaulted CCP.