Development of the Regulatory Regime for OTC Derivatives Clearing

Abstract

This chapter describes the efforts to regulate the over-the-counter (OTC) derivatives sector. The business of clearing OTC derivatives is inherently global. The chapter begins by looking at the earliest efforts to regulate the sector starting in the United States in 1987; global standard setters’ first discussions in 1997; increasing concerns after the Long-Term Capital Management (LTCM) default; the first non-legislative measures of the European Union (EU) in 2006; and the watershed moment in 2008 after the Lehman’s default unleashed the financial crisis, resulting in a strong call from G20 leaders to introduce tighter, global regulation of the sector. It traces the preparation and adoption of the EU’s regulatory response: the European Market Infrastructure Regulation (EMIR). The chapter then discusses the first material amendment to EMIR: the EMIR REFIT Regulation. It also examines probably the most politically contentious revision of EMIR: ‘EMIR 2.2’, which contains the EU’s response to Brexit in particular, and the legislative proposal of December 2022 to strengthen the EU’s strategic autonomy by reducing its dependence on central counterparties (CCPs) in the United Kingdom. Finally, the chapter considers the CCP Recovery and Resolution Regulation.