Publication: How to Analyze the Costs and Benefits of Introducing a Central Counterparty
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2022-01-31
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2022-05-13
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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.
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“World Bank. 2022. How to Analyze the Costs and Benefits of Introducing a Central Counterparty. Equitable Growth, Finance & Institutions Insight;. © World Bank. http://hdl.handle.net/10986/37424 License: CC BY 3.0 IGO.”
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