What Kind of Thing is a Central Counterparty? The Role of Clearing Houses as a Source of Policy Controversy

Forthcoming in Zebregs, B., de Serière, V., Pearson, P., and Stegeman, R. (eds), Clearing OTC Derivatives in Europe (Oxford University Press)

LSE Legal Studies Working Paper No. 08/2022

35 Pages Posted: 8 Apr 2022 Last revised: 9 Apr 2022

See all articles by Rebecca Lewis

Rebecca Lewis

Yale University - Law School

David Murphy

London School of Economics - Law School

Date Written: March 20, 2022

Abstract

Public policy surrounding central counterparties (‘CCPs’) is beset by conflicts between stakeholders. These turn on who bears which risks, who profits from clearing, and who has what say in CCP governance. They involve CCP equity holders, clearing members, clients, regulators, and taxpayers, among others. In order to probe them, three stylized edge case models of the role of the CCP are introduced: utilities, for-profit corporations under shareholder primacy, and clubs. The governance of each edge case is discussed and compared to the current situation in clearing and its framing in regulatory requirements. The risks in central clearing, who bears them, and the policies surrounding them, are surveyed. The paper argues that stakeholder risk-bearing affects CCP governance because risk bearing should, in equity, be accompanied by governance rights. Each edge case model suggests a different resolution to the key conflicts but none of the models are sufficient to explain existing CCP practice, and the resolutions suggested are unsatisfactory. This insufficiency suggests that the current policy conflicts are rooted in fundamental disagreements about the role of the CCP and thus in whose interests the CCP should act. Stakeholder theory is presented as a model which explains the nature of these conflicts and their persistent character, and which can provide an equitable setting for their continuing re-negotiation.

Keywords: CCP, CCP Goverance, CCP Loss Allocation, Central Clearing, Skin in the game, Stakeholder governance

Suggested Citation

Lewis, Rebecca and Murphy, David, What Kind of Thing is a Central Counterparty? The Role of Clearing Houses as a Source of Policy Controversy (March 20, 2022). Forthcoming in Zebregs, B., de Serière, V., Pearson, P., and Stegeman, R. (eds), Clearing OTC Derivatives in Europe (Oxford University Press), LSE Legal Studies Working Paper No. 08/2022, Available at SSRN: https://ssrn.com/abstract=4069312 or http://dx.doi.org/10.2139/ssrn.4069312

Rebecca Lewis

Yale University - Law School ( email )

David Murphy (Contact Author)

London School of Economics - Law School

Houghton Street
London WC2A 2AE, WC2A 2AE
United Kingdom

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