On March 1, 2016, the European Securities and Market Authority (ESMA) released its final report on risks and cost implications of interoperable arrangements between central clearing houses (CCPs) that are established under the European Market Infrastructure Regulation (EMIR). The 30-page report, which is expected to feed into any similar report that the Commission will prepare and submit to the European Parliament and the Council of the EU, describes the various cross-link scenarios and considers the costs and risks of each, now that interoperability arrangements in the scope of EMIR involving EU CCPs have been approved (pursuant to EMIR’s Article 54).

The analysis performed in the report is based on the assumption that individual methodologies designed to size the resources of all CCPs party to the interoperability arrangement are robust, prudent, and fulfill EMIR requirements, including the Guidelines and Recommendations, thus excluding the re-assessment of default probabilities of individual CCPs.

The report commences with a “General Overview” of the interoperable arrangements between CCPs, taking into account the benefits and the impact on costs. It then moves into a section on the impact on risks at individual CCP level and assessment of risk-management systems and models, more specifically pertaining to inter-CCP credit risk and operational risk.

The report concludes with the notion that the main risk created for “inter-operable CCPs is in the inter-CCP credit risk which is the counterparty credit risk resulting from exposures between interoperable CCPs, i.e. the risk that one CCP, party to an interoperable arrangement, is unable to honor its financial obligations that are due to its interoperable counterparty.”