Elgar Financial Law and Practice series
Chapter 20: USE OF FINANCIAL COLLATERAL IN UK CLEARING HOUSES
Clearing houses form a vital part of the infrastructure that underpins operations in the UK financial markets. The financial crisis of 2008 and its aftermath highlighted the importance of clearing in financial markets as a means of managing risk and improving transparency. Clearing houses typically involve a central counterparty (‘CCP’). This interposes itself in defined classes of financial transactions, acting as the buyer to every seller and the seller to every buyer, in order to protect participants from the risk of counterparty default. There has been a huge increase in the volume and range of over-the-counter (‘OTC’) derivative contracts required to be cleared through an authorised CCP as a result of the G20 commitment at the Pittsburg Summit in September 2009. This commitment has been implemented by different legislative measures, including the 2010 Dodd-Frank Wall Street and Consumer Protection Act in the USA and Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (the ‘EMIR 1 Regulation’) in the EU. The volume of cleared transactions will increase further when the mandatory clearing obligation under the EMIR 1 Regulation comes into full force. The EMIR 1 Regulation is supplemented by a number of EU Delegated Technical Regulations, which establish more detailed technical standards relating to the primary requirements set out in the EMIR 1 Regulation (the ‘EMIR 2 Regulations’). These include in particular EU Commission Delegated Regulation No 153/2012 which sets out regulatory technical standards on requirements for central counterparties (the ‘EMIR 2 CCP Regulation’).
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