In CCP We Trust … Or Do We? Assessing the Regulation of Central Clearing Counterparties in Europe

Capital Markets Law Journal (2020), 15(1), 70-97

33 Pages Posted: 18 Jun 2018 Last revised: 31 Mar 2020

See all articles by Hossein Nabilou

Hossein Nabilou

Universite du Luxembourg - Faculty of Law, Economics and Finance; University College London Center for Blockchain Technologies

Ioannis Asimakopoulos

Universite du Luxembourg, Faculty of Law, Economics and Finance

Date Written: June 1, 2018

Abstract

As part of financial market infrastructures, central counterparties (CCPs) have long been deemed systemically important and are likely to gain in importance due to the regulatory developments mandating central clearing for an increasing number of financial products. This paper focuses on the regulation as well as the recovery and resolution of CCPs in Europe. The existing CCP regulatory framework consists of ex-ante measures, including, among others, capital and liquidity requirements, initial and variation margins, and loss sharing mechanisms. In addition, the European proposal for the recovery and resolution of CCPs (the Proposal) contains several ex-post regulatory measures mainly in the form of rules for recovery and orderly resolution.

Having studied the prudential regulatory measures for CCPs contained in the European Market Infrastructure Regulation and the ex-post recovery and resolution measures of the Proposal, this paper puts a spotlight on the specific shortcomings of the existing and proposed rules, in particular in terms of misaligned incentives, externalities, collective action problems, and certain practical impediments, and concludes that it would be misguided to inordinately rely on ex-post measures. Highlighting the limitations of the recovery and resolution mechanisms, this paper proposes that given the systemic importance of CCP functions, it is critical to improve the ex-ante measures whose objective is to prevent the failure of a CCP, rather than ex-post measures, which kick in after its failure. Accordingly, recommendations for making such improvements are proposed.

Keywords: Central counterparties, clearing, settlement, post trade, central counterparty recovery and resolution, financial market infrastructures

JEL Classification: F3, G1, G2, G3, K2, N2

Suggested Citation

Nabilou, Hossein and Asimakopoulos, Ioannis, In CCP We Trust … Or Do We? Assessing the Regulation of Central Clearing Counterparties in Europe (June 1, 2018). Capital Markets Law Journal (2020), 15(1), 70-97, Available at SSRN: https://ssrn.com/abstract=3188844 or http://dx.doi.org/10.2139/ssrn.3188844

Hossein Nabilou (Contact Author)

Universite du Luxembourg - Faculty of Law, Economics and Finance ( email )

4 Rue Alphonse Weicker
Office: B203
Luxembourg, L-2721
Luxembourg
+352 46 66 44 5450 (Phone)
+352 46 66 44 35450 (Fax)

University College London Center for Blockchain Technologies ( email )

UCL CBT UCL Computer Science
Malet Place London WC
London, London
United Kingdom

Ioannis Asimakopoulos

Universite du Luxembourg, Faculty of Law, Economics and Finance ( email )

162a, avenue de la Faïencerie
Luxembourg-Limpertsberg
Luxembourg

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