Interoperable and Silo clearing: How do clearing setups affect collateral requirements and systemic risk?

Abstract

Clearing plays a crucial role in the post trade processing of cash equities trading. It not only ensures the timely and accurate settlement of securities but also serves as a risk mitigation tool for market participants. The European equities markets uses three primary clearing setups: silo, interoperable, and preferred. This thesis explores the differences between the interoperable and silo setups, focusing primarily on the implications for margin or collateral requirements and the impact on systemic risk. While our research does not establish a direct causality, it indicates that the silo setup generally underperforms in comparison to interoperable setups in terms of both the total margin requirements imposed on market participants and its impact on systemic risk.