Regulation of Central Counterparties (CCPs) in Light of Systemic Risk

Against the background of the economic dynamics of financial markets, this book examines the EU regulatory and supervisory framework for central counterparties (CCPs) that clear derivative contracts. The book combines a deep technical regulatory analysis of the applicable EU and US rules with a policy-oriented perspective, offering novel insights for both policymakers and practitioners, particularly with respect to CCP market access regimes.

Years before the 2008 financial crisis, Wall Street magnate Warren Buffett described derivative contracts as “financial weapons of mass destruction”. This book analyzes why and how—in a bid to discharge the destructive forces that derivatives may entail—international policy initiatives have converted CCPs for derivatives into the nuclear powerhouses of modern financial markets. Trillions of euros now change hands through these institutions every year. This risk centralization has turned CCPs into powder kegs with the potency to ignite financial and economic crises. Viewed through this lens, regimes for CCP market access constitute a pivotal safety valve for financial stability. In the post-Brexit era, the question of how this safety valve ought to be designed has taken center stage in the political arena but has remained vastly undertheorized.

By examining how CCPs serve as risk managers and loss absorbers, under what conditions they can become sources of financial instability, and how the body of literature on the different emanations of systemic risk may be applied to the market for centrally cleared derivatives, this book develops a framework for thinking about the structure of CCP market access regimes. The book then employs this framework to assess the EU rules for CCP market access. The outcome of this exercise suggests that the increasingly inward-looking EU approach towards CCP market access may not promote financial stability.