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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.
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Abbreviations

Alexandra G. Balmer

AAA

best credit rating by Standard & Poor’s

AIG

American International Group

AIGFP

American International Group Financial Products

Basel II

Second Bank Capital Accord

Basel III

Third Bank Capital Accord

BCBS

Basel Committee on Banking Supervision

BIS

Bank for International Settlements

BOTCC

Chicago Board of Trade Clearing Corporation

BRRD

Bank Recovery and Resolution Directive

CBOT

Chicago Board of Trade

CCP

central counterparty

CCPRRR

European Commission, Proposal for a Regulation of the European Parliament and of the Council on a Framework for the Recovery and Resolution of Central Counterparties

CDO

collateralised debt obligation

CDS

credit default swap

CEA

Commodity Exchange Act

CFMA

Commodity Futures Modernization Act

CFTC

US Commodity Futures Trading Commission

CIGI

Centre for International Governance Innovation

CME

Chicago Mercantile Exchange

CPMI

Committee on Payments and Market Infrastructures

CPSS

Committee on Payment and Settlement Systems

CRD

Capital Requirements Directive

CRR

Capital Requirements Regulation

CSD

Central Securities Depository

DCO

derivatives clearing organisation

Dodd-Frank

Dodd-Frank Wall Street Reform and Consumer Protection Act

EBA

European Banking Authority

EC

European Community

ECB

European Central Bank

EIOPA

European Insurance and Occupational Pensions Authority

EMIR

European Market Infrastructure Regulation

EMIR II

European Commission, Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories

ESMA

European Securities Market Authority

ESRB

European Systemic Risk Board

EU

European Union

EUR

Euro

FASB

Financial Accounting Standards Board

FDIC

Federal Deposit Insurance Corporation

Fed

Federal Reserve System

FINMA

Swiss Financial Market Authority

FMI

financial market infrastructure

FN

footnote

FSAP

Financial Services Action Plan

FSB

Financial Stability Board

FSF

Financial Stability Forum

FSOC

Financial Stability Oversight Council

FTT

Financial Transaction Tax

FX

foreign exchange

G7

Group of Seven

G10

Group of Ten

G20

Group of Twenty

G-SIFI

global systemically important financial institution

ICMA

International Capital Market Association

IMF

International Monetary Fund

IOSCO

International Organization of Securities Commissions

ISDA

International Swaps and Derivatives Association

LCH

LCH.Clearnet (London Clearing House)

LOLR

lender of last resort

LTCM

long-term capital management

MAD

Market Abuse Directive

MAR

Market Abuse Regulation

MBS

mortgage-backed security

MiFID I

Market Infrastructure Directive

MiFID II

Market Infrastructure Directive

MiFIR

Market Infrastructure Regulation

N

recital

ODSG

OTC Derivatives Supervisors Group

OJ

Official Journal (EU)

OLA

Orderly Liquidation Authority

OTC

over-the-counter

OTF

organised trading facility

PFMI

Principles for Market Infrastructures

Pub. L.

Public Law (US)

REFIT

EU Regulatory Fitness Performance

SEC

US Securities and Exchange Commission

SIDCO

systemically important derivatives clearing organisation

SIFI

systemically important financial institution

SIFMA

Securities Industry and Financial Markets Association

SIX

Swiss Exchange

SSS

Securities Settlement System

Stat

Statutes at Large (US)

TARP

Troubled Asset Relief Program

TFEU

Treaty of the Functioning of the European Union

TR

trade repository

USC

United States Code

USD

United States Dollar

WTO

World Trade Organization