Clearinghouses for Over-the-Counter Derivatives

Abstract

Part I provides an overview of the exchange-traded and OTC derivative markets, their regulation prior to the recent financial crisis and subsequent passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), risks posed by and the eventual institutional collapses that occurred due to unregulated OTC derivative markets, and global policymakers’ post-financial crisis framework of reforms for the OTC derivative markets. Part II focuses on clearinghouses, the centerpiece of global policymakers’ post-financial crisis reforms to the OTC derivative markets. It discusses their history, structure, risk management function, ownership models, and regulation/supervision. Part III then turns to salient systemic risk and risk-management issues surrounding these institutions, including risk concentrations, the increasing interconnectedness of systemically important institutions, problems of market fragmentation, risk-management standards and practices, investment practices, and cybersecurity concerns. Part IV examines the most important, current area of policy focus surrounding these institutions: clearinghouse recovery and resolution. Part V highlights potential policy options going forward and concludes.