Legal Perspectives on Client Clearing

Abstract

The post-crisis global regulatory regime for the over-the-counter ('OTC') derivatives markets mandates the use of central counterparties ('CCPs'). CCPs serve markets by becoming buyer to every seller and seller to every buyer. Two techniques, selective membership and collecting margin, are central to CCPs working safely. The objective of this article is to use a legal perspective to consider how G20-led reforms to the OTC markets interact with, and complicate, these two techniques. The article starts by establishing that arrangements allowing CCP members to access clearing service for their clients (‘client clearing’) will become increasingly important as a result of regulatory reform, because parties unwilling or unable to become members will now require access. The article then demonstrates how client clearing complicates the legal underpinnings of CCPs, in particular as they relate to the provision of margin. The problematic interaction between the new clearing regime and the UK rules on client assets is considered as an example. The article concludes that these legal complexities need to be addressed at EU level in order to safeguard the functions that attracted regulators to clearing in the first place.