A central counterparty is an institution interposed in securities trades between the two contracting parties, protecting the latter against default risk and guaranteeing the successful execution of the transaction. The central counterparty protects itself against its own risk by taking securities or cash collateral (margins) commensurate with the value and risk of the contracts guaranteed. Central counterparty services can be provided not only in the markets that expressly provide for them but also in respect of over-the-counter trading outside regulated markets.
The central counterparty adopts a multi-level system of financial safeguards: membership eligibility requrements, margins, capital and financial resources. In the event of a participant’s default, the central counterparty follows special procedures to cover the losses, not only out of margins but using a default fund financed by participants’ contributions as well as its own assets.
The principle of privatization of securities depositories and settlement also applies to guarantee systems. The Consolidated Law on Finance recognizes the private-law nature of the operation of central counterparty settlement systems and requires approval of their operating rules and oversight by two authorities, the Bank of Italy and Consob.
Only one central counterparty is authorized in Italy, Cassa di compensazione e garanzia S.p.A. (CC&G). Originally, CC&G dealt only with financial derivatives, but with time its activities were extended to shares (on a compulsory basis) and Italian government securities (on an optional basis); it now covers a broad range of trading platforms and financial instruments. CC&G also provides guarantees for the collateralized interbank deposit market NewMIC. Thanks to interoperability arrangements, intermediaries dealing in instruments traded on MTS, EuroMTS and BrokerTec can belong either to CC&G or to the French central counterparty LCH.Clearnet SA, as if the two partner institutions formed a single “virtual” central counterparty.
In March 2013 EU Regulation 648/2012, the “European Markets Infrastructure Regulation” (EMIR), went into effect. EMIR is designed to enhance the security and transparency of derivatives trading. It covers a multiplicity of intermediaries and operating processes, with a view to instituting a market framework in which common rules and greater information increase competitiveness and trust in the markets. The key points are compulsory use of an authorized central counterparty for OTC trading in standardized derivatives, compulsory registration of derivatives contracts with an authorized trade repository, new organizational and prudential requirements and requirements relating to risk management in clearing services. It also provides for collegial oversight by all the authorities, domestic and foreign, that are affected by the activity of a central counterparty that operates cross-border.
CC&G was authorized, pursuant to EMIR, to provide central counterparty services in Italy by a provision of the Bank of Italy, in agreement with Consob, dated 20 May 2014. The same day, again pursuant to EMIR, the provision approving the interoperability arrangements with the French central counterparty Clearnet SA was issued.
The Bank of Italy’s oversight tasks include assessment of the Italian securities settlement system’s compliance with international standards, as set out in the ESCB-CESR Recommendations for Securities Settlement Systems and, since April 2012, the CPSS-IOSCO Principles for Financial Market Infrastructures.