Edited by Kern Alexander and Rahul Dhumale
Chapter 12: The European Regulation of Central Counterparties: Some International Challenges
Kern Alexander Editors’ abstract: The chapter analyses the European Market Infrastructure Regulation (EMIR) that requires over-the-counter derivatives (OTC) market by requiring standardised OTC derivative contracts to be traded on exchanges and electronic trading platforms and to shift the clearing of these instruments away from opaque bilateral structures to centralised clearing through transparent and regulated central counterparties (CCPs). These proposals are designed in substantial part to control systemic risk in wholesale capital markets and in particular in the OTC derivatives markets, which was a source of the systemic risk that toppled Lehman Brothers in 2008 and nearly caused the collapse of the European and US financial systems. The chapter also draws some comparisons with the US Dodd-Frank Act’s requirements for centralised clearing and suggests that EMIR has in key areas different prudential regulatory requirements for CCPs than the US regulators have proposed so far and therefore could potentially create market access problems for CCPs based in the US and other third countries seeking access to the EU market. But the EU and US legislation and regulations are not yet finalised at the time of publication and future convergence remains possible. Other issues addressed concern the type of ownership model for CCPs and the role of the European Central Bank in supervising CCPs. I. CLEARING AND FINANCIAL MARKETS The efficient operation of financial markets depends on well regulated clearing and settlement systems. Clearing typically involves a central counter party (CCP) or clearing house acting for a fee as a buyer for every...
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