The Extra-Territorial Regulation of Clearinghouses
40 Pages Posted: 12 Sep 2015
Date Written: September 11, 2015
This Article argues that post-Crisis reform of over-the-counter derivatives is in trouble. While regulators agree on the broad strokes of regulation, they diverge on detail, often on core issues like how clearinghouses should manage risk. In examining divergences between United States and Europe, this Article makes three points. First, divergences in clearinghouse regulation matter in derivatives markets because these markets are uniquely international in scope. Contracts involve counterparties in different countries. Many transactions comprise cross-border aspects lacking a geographical anchor. Where derivatives traders face uncertainty, they can be dis-incentivized from observing laws or motivated to seek out lowest-cost compliance options. Secondly, although both the United States and European Union have adopted common ground-rules, their approaches to implementation differ in matters of detail. Such divergences prevent regulators from recognizing each other’s clearinghouses as sufficiently robust. Thirdly, while acknowledging that mutual recognition is the most appropriate way forward, substantial shortcomings exist with this approach. This Article highlights continuing areas of structural divergence – like access to emergency funding and bailouts – that impact the costs of E.U. and U.S. regimes. Where costs diverge, traders seek out avenues for regulatory arbitrage to lower their costs of compliance. In concluding, this Article explores implications for reform.
Keywords: clearinghouses, mutual recognition, extraterritoriality, derivatives, collateral, margin, credit derivatives, futures, Dodd-Frank, EMIR, mutualization, default fund, resolution, bailouts, G-20, Pittsburgh Declaration, CFTC, European Union, systemic risk
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