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Alexandra G. Balmer

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Alexandra G. Balmer

The introduction chapter offers an introduction to the topic of derivatives and financial stability, as well as systemic risk and macro-prudential regulation.

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Alexandra G. Balmer

The second chapter introduces and describes the main purposes of derivatives – hedging and speculation – as well as the core types of derivatives. Furthermore, the financial crisis of 2007–2009 is described by highlighting the case of AIG.

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Alexandra G. Balmer

The third chapter offers a definition of clearing and central counterparties (CCPs), as well as the historic development and origins of CCPs. The main concepts of clearing, i.e. member selection, novation, netting, collateral and default fund mechanism, and transparency requirements are discussed. Also, the success of LCH.Clearnet in winding down its exposure to Lehman Brothers is highlighted as a case study to underline why clearing was mandated in the wake of the crisis for financial derivatives.

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Alexandra G. Balmer

The fourth chapter considers the regulation of derivatives from the end of the Bretton Woods system until the financial crisis for both the EU and United States. It also outlines the objectives of the 2009 G20 commitments in the wake of the financial crisis regarding new and globally harmonised regulation for financial derivatives.

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Alexandra G. Balmer

The fifth chapter analyses the post-crisis derivatives regulation reform by comparing the EU regulation in EMIR with that of Dodd-Frank in the United States, highlighting similarities and differences between the two. The lack of an existing recovery and resolution framework is also discussed in this chapter.

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Alexandra G. Balmer

The sixth chapter discusses the current regulatory reform plans in Europe, to redraft EMIR (EMIR II) and create a recovery and resolution regulation for CCPs. It discusses the strengths and weaknesses of the proposed recovery and resolution for CCPs in light of the overall objectives of the G20 in the wake of the financial crisis, as well as further addressing challenges the EU and United States are facing: Brexit and a (potential) reform of Dodd-Frank.

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Alexandra G. Balmer

The seventh chapter provides an in-depth analysis of the challenges CCPs currently face, not only in light of regulation, but also arbitrage, moral hazard, information asymmetry, adverse selection and the too-big-to-fail problematics. Based on the determined shortcomings, a novel solution is recommended: to mandate CCPs to join a global default fund, which is funded through industry-based contributions.

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Alexandra G. Balmer

The eighth chapter summarises and concludes the preceding chapters, recapping all findings and recommending a way forward for CCPs.

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Regulating Financial Derivatives

Clearing and Central Counterparties

Alexandra G. Balmer

This book puts forward a holistic approach to post-crisis derivatives regulation, providing insight into how new regulation has dealt with the risk that OTC derivatives pose to financial stability. It discusses the implications that post crisis regulation has had on central counterparties and the risk associated with clearing of OTC derivatives. The author offers a novel solution to tackle the potential negative externalities from the failure of a central counterparty and identifies potential new risks arising from post crisis reforms.