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
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