Get the balance right: private rights and public policy in the post-crisis regime for OTC derivatives

Abstract

The reforms introduced since the 2008 financial crisis have left OTC derivatives in a state of hybridity. What was once a largely private, bilateral market, relatively unconstrained by public policy, has been transformed by a variety of regulatory initiatives. The principal ones for our purposes are the mandatory central clearing of certain standardized OTC derivatives; higher capital requirements for bilateral OTC portfolios; and the requirement for many parties to post initial margin and exchange variation margin with their counterparties on their OTC derivatives exposures. These reforms have built upon features of the pre-crisis OTC derivatives market, preserving some aspects and modifying others. The result is a legal and regulatory framework which is an amalgam of private and public law elements. The goal of this article is to explore the implications of this hybridity in the context of ongoing debates about the recovery and resolution of central counterparties (CCPs). ...