How to Analyze the Costs and Benefits of Introducing a Central Counterparty
Central counterparties (CCPs) require a certain level of market development to operate in a safe and efficient manner. This note presents a practical cost-benefit analysis framework for country authorities to decide whether this specific type of fi...
| Main Author: | |
|---|---|
| Format: | Working Paper |
| Language: | English |
| Published: |
Washington, DC: World Bank
2022
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/099333205052228715/IDU01658a76e019f204d090ae2d0e6b4f7764210 http://hdl.handle.net/10986/37424 |
| Summary: | Central counterparties (CCPs) require
a certain level of market development to operate in a safe
and efficient manner. This note presents a practical
cost-benefit analysis framework for country authorities to
decide whether this specific type of financial market
infrastructure will benefit their markets, financial
institutions, and investors, or whether the costs of a CCP
are higher than its benefits. The note discusses three key
questions: (1) Are the necessary preconditions met-for
example, is the market sufficiently liquid to enable the CCP
to calculate margin; (2) Will a CCP support a
well-functioning market; and (3) Is there a positive
business case Introducing a CCP is recommended only when all
questions can be answered in the affirmative. Otherwise,
alternative clearing models should be considered, such as
bilateral clearing between financial institutions,
multilateral netting with a guarantee, prefunding, or
clearing through a CCP abroad. Often, introducing a CCP
uncovers a chicken-and-egg problem whereby a CCP will
positively impact market liquidity while at the same time a
minimum level of market liquidity is a condition to set up a
CCP. In such cases, the introduction of a CCP should be part
of a comprehensive market development plan. |
|---|