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At the End of the Waterfall – Resolvability of Central Counterparties

Gárdos, Péter

Credit and Capital Markets – Kredit und Kapital, Vol. 54 (2021), Iss. 4: pp. 505–531

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Article Details

Author Details

Péter Gárdos, PhD (ELTE Budapest) assistant professor, Eötvös Loránd University Department for Civil Law, Budapest, Hungary.

References

  1. A Path Forward for CCP Resilience, Recovery, and Resolution (updated March 2020), https://www.jpmorgan.com/content/dam/jpm/cib/complex/content/news/a-path-forward-for-ccp-resilience-recovery-and-resolution/pdf-0.pdf.  Google Scholar
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  9. Binder, J-H. (2021): Central Counterparties’ Insolvency and Resolution – The New EU Regulation on CCP Recovery and Resolution, EBI Working Paper Series 2021 – no. 82.  Google Scholar
  10. Braithwaite, J. (2015): Legal Perspectives on Client Clearing, LSE Law, Society and Economy Working Papers 14/2015.  Google Scholar
  11. Braithwaite, J. (2016): The Dilemma of Client Clearing in the OTC Derivatives Markets, Eur Bus Org Law Rev, 2016/17, 355–378.  Google Scholar
  12. Braithwaite, J./Murphy, D. (2016): Got to be certain: the legal framework for CCP default management processes, Bank of England Financial Stability Paper Number 37.  Google Scholar
  13. Braithwaite, J./Murphy, D. (2017a): Get the balance right: private rights and public policy in the post-crisis regime for OTC derivatives, CMLJ, Vol. 12, No. 4 480–509.  Google Scholar
  14. Braithwaite, J./Murphy, D. (2017b): Central Counterparties (CCPs) and the law of default management, Journal of Corporate Law Studies, 17:2, 291–325.  Google Scholar
  15. Braithwaite, J./Murphy, D. (2019): Improving resolvability: partial property transfers and central counterparties, CMLJ, Vol. 14. No. 4. 431–450.  Google Scholar
  16. Braithwaite, J./Murphy, D. (2020): Take On Me: OTC derivatives client clearing in the European Union, LSE Law, Society and Economy Working Papers 7/2020.  Google Scholar
  17. Canini, R. (2021): Central Counterparties Are Too Big for the European Securities and Markets Authority (Alone): Constructive Critique of the 2019 CCP Supervision Regulation, European Business Organization Law Review, Eur Bus Org Law Rev.  Google Scholar
  18. Carter, L./Garner, M. (2015): Skin in the Game – Central Counterparty Risk Controls and Incentives, Reserve Bank of Australia Bulletin, June Quarter 2015, 79–88.  Google Scholar
  19. Chamorro-Courtland, C. (2011): Counterparty Substitution in Central Counterparty (CCP) Systems, 26 B.F.L.R., 517–538.  Google Scholar
  20. Chamorro-Courtland, C. (2012): The Trillion Dollar Question: Can a Central Bank Bail Out a Central Counterparty Clearing House Which is “Too Big to Fail”?, 6 Brook. J. Corp. Fin. & Com. L., 433–485.  Google Scholar
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  23. Cox, R. T./Steigerwald, R. S. (2017): A CCP is a CCP is a CCP, Federal Reserve Bank of Chicago PDP 2017-01.  Google Scholar
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  27. Du, W./Gadgil, S./Gordy, M. B./Vega, C. (2016): Counterparty risk and Counterparty Choice in the Credit Default Swap Market, Finance and Economics Discussion Series 2016-087.  Google Scholar
  28. Duffie, D. (2015): Resolution of Failing Central Counterparties, in: Jackson, T. et al. (eds.), Making Failure Feasible: How Bankruptcy Reform Can End ‘Too Big To Fail’, Hoover Institution Press, 2015, 87–109.  Google Scholar
  29. Duffie, D./Zhu, H. (2011): Does a Central Clearing Counterparty Reduce Counterparty Risk?, Review of Asset Pricing Studies, Vol. 1(1), 74–95.  Google Scholar
  30. European Association of CCP Clearing Houses (2020): EACH Paper – Carrots and sticks: how the skin in the game incentivises CCPs to perform robust risk management, https://www.eachccp.eu/wp-content/uploads/2021/01/EACH-Paper-Carrots-and-sticks_How-the-skin-in-the-game-incentivises-CCPs-to-perform-robust-risk-management-January-2021. ‌pdf.  Google Scholar
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  38. Financial Services Authority (2009): The Turner Review: A regulatory response to the global banking crisis.  Google Scholar
  39. Financial Stability Board (2014): Key Attributes of Effective Resolution Regimes for Financial Institutions, https://www.fsb.org/work-of-the-fsb/market-and-institutional-resilience/post-2008-financial-crisis-reforms/effective-resolution-regimes-and-policies/key-attributes-of-effective-resolution-regimes-for-financial-institutions/.  Google Scholar
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  42. Genito, L. (2019): Mandatory clearing: the infrastructural authority of central counterparty clearing houses in the OTC derivatives market. Review of International Political Economy, Vol. 26(5), 938–962.  Google Scholar
  43. Huang, W. (2019): Central counterparty capitalization and misaligned incentives, BIS Working Paper No. 767.  Google Scholar
  44. Huang, W./Takáts, E. (2020a): The CCP-bank nexus in the time of Covid-19, BIS Bulletin, No. 13.  Google Scholar
  45. Huang, W./Takács, E. (2020b): Model risk at central counterparties: Is skin-in-the-game a game changer?, BIS Working Paper No. 866.  Google Scholar
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  51. Morkötter, S./Pleus, J./Westerfield, S. (2012): The Impact of Counterparty Risk on Credit Default Swap Pricing Dynamics, The Journal of Credit Risk, Vol. 8(1), 66–83.  Google Scholar
  52. Nabilou, H./Asimakopoulos, I. G. (2020): In CCP we trust … or do we? Assessing the regulation of central clearing counterparties in Europe, CMLJ, Vol. 15(1), 70–97.  Google Scholar
  53. Norman, P. (2011): The Risk Controllers. Central Counterparty Clearing in Globalised Financial Markets (Wiley).  Google Scholar
  54. Paddrik, M./Zhang S. (2020): Central Counterparty Default Waterfalls and Systemic Loss, Office of Financial Research Working Paper 20-04, https://www.financialresearch.gov/working-papers/files/OFRwp-20-04_central-counterparty-default-waterfalls-and-systemic-loss.pdf.  Google Scholar
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  58. Rehlon, A./Nixon, D. (2013): Central counterparties: What are they, why do they matter and how does the Bank supervise them?, Bank of England Quarterly Bulletin 2013 Q2, 147–156.  Google Scholar
  59. Sayah, M. (2017): Counterparty Credit Risk in OTC Derivatives under Basel III, Journal of Mathematical Finance, 7, 1–38.  Google Scholar
  60. Singh, M./Turing, D. (2018): Central Counterparties Resolution – An Unresolved Problem, IMF Working Paper WP/18/65 6.  Google Scholar
  61. Steigerwald, R. S. (2015): Central counterparty clearing and systemic risk regulation. In Malliaris, A. G./Ziemba, W. T. (eds.): The world scientific handbook of futures markets, 181–246. Singapore: World Scientific.  Google Scholar
  62. Swan, E. (2000): Building the Global Market: A 4000 year history of derivatives (Kluwer).  Google Scholar
  63. Weber, M. (2016): Central Counterparties in the OTC Derivatives Market from the Perspective of the Legal Theory of Finance, Financial Market Stability and the Public Good. Eur Bus Org Law Rev (2016) 17, 71–103.  Google Scholar
  64. Wendt, F. (2015): Central Counterparties: Addressing their Too Important to Fail Nature. IMF Working Paper No. 15/21.  Google Scholar
  65. Xiao, T. (2019): Pricing Interest Rate Swap Subject to Bilateral Counterparty Risk, MPRA Paper No. 94233.  Google Scholar
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  68. Armour, J./Awrey, D./Davies, P./Enriques, L./Gordon, J. N./Mayer, C./Payne, J. (2016): Principles of Financial Regulation (Oxford).  Google Scholar
  69. Arora, N./Gandhi, P./Longstaff, F. A. (2012): Counterparty credit risk and the credit default swap market, Journal of Financial Economics, Vol. 103(2), 280–293.  Google Scholar
  70. Baker, C. M. (2021): Clearinghouse Shareholders and “No Creditor Worse Off Than in Liquidation” Claims, Transactions: The Tennessee Journal of Business Law, Vol. 22(2), 335–365.  Google Scholar
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  74. Binder, J-H. (2021): Central Counterparties’ Insolvency and Resolution – The New EU Regulation on CCP Recovery and Resolution, EBI Working Paper Series 2021 – no. 82.  Google Scholar
  75. Braithwaite, J. (2015): Legal Perspectives on Client Clearing, LSE Law, Society and Economy Working Papers 14/2015.  Google Scholar
  76. Braithwaite, J. (2016): The Dilemma of Client Clearing in the OTC Derivatives Markets, Eur Bus Org Law Rev, 2016/17, 355–378.  Google Scholar
  77. Braithwaite, J./Murphy, D. (2016): Got to be certain: the legal framework for CCP default management processes, Bank of England Financial Stability Paper Number 37.  Google Scholar
  78. Braithwaite, J./Murphy, D. (2017a): Get the balance right: private rights and public policy in the post-crisis regime for OTC derivatives, CMLJ, Vol. 12, No. 4 480–509.  Google Scholar
  79. Braithwaite, J./Murphy, D. (2017b): Central Counterparties (CCPs) and the law of default management, Journal of Corporate Law Studies, 17:2, 291–325.  Google Scholar
  80. Braithwaite, J./Murphy, D. (2019): Improving resolvability: partial property transfers and central counterparties, CMLJ, Vol. 14. No. 4. 431–450.  Google Scholar
  81. Braithwaite, J./Murphy, D. (2020): Take On Me: OTC derivatives client clearing in the European Union, LSE Law, Society and Economy Working Papers 7/2020.  Google Scholar
  82. Canini, R. (2021): Central Counterparties Are Too Big for the European Securities and Markets Authority (Alone): Constructive Critique of the 2019 CCP Supervision Regulation, European Business Organization Law Review, Eur Bus Org Law Rev.  Google Scholar
  83. Carter, L./Garner, M. (2015): Skin in the Game – Central Counterparty Risk Controls and Incentives, Reserve Bank of Australia Bulletin, June Quarter 2015, 79–88.  Google Scholar
  84. Chamorro-Courtland, C. (2011): Counterparty Substitution in Central Counterparty (CCP) Systems, 26 B.F.L.R., 517–538.  Google Scholar
  85. Chamorro-Courtland, C. (2012): The Trillion Dollar Question: Can a Central Bank Bail Out a Central Counterparty Clearing House Which is “Too Big to Fail”?, 6 Brook. J. Corp. Fin. & Com. L., 433–485.  Google Scholar
  86. Communication from the Commission to the European Parliament, The Council, The European Economic and Social Committee, the Committee of the Regions and the European Central Bank Ensuring efficient, safe and sound derivatives markets: Future policy actions COM(2009) 563 final.  Google Scholar
  87. Cont, R. (2017): Central Clearing and Risk Transformation, Norges Bank Research, 3/2017.  Google Scholar
  88. Cox, R. T./Steigerwald, R. S. (2017): A CCP is a CCP is a CCP, Federal Reserve Bank of Chicago PDP 2017-01.  Google Scholar
  89. de Serière, V. P. G./van der Houwen, D. M. (2016): “No Creditor Worse Off” in Case of Bank Resolution: Food for Litigation?, 31 J.I.B.L.R., Issue 7, 376–384.  Google Scholar
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  92. Du, W./Gadgil, S./Gordy, M. B./Vega, C. (2016): Counterparty risk and Counterparty Choice in the Credit Default Swap Market, Finance and Economics Discussion Series 2016-087.  Google Scholar
  93. Duffie, D. (2015): Resolution of Failing Central Counterparties, in: Jackson, T. et al. (eds.), Making Failure Feasible: How Bankruptcy Reform Can End ‘Too Big To Fail’, Hoover Institution Press, 2015, 87–109.  Google Scholar
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  108. Huang, W. (2019): Central counterparty capitalization and misaligned incentives, BIS Working Paper No. 767.  Google Scholar
  109. Huang, W./Takáts, E. (2020a): The CCP-bank nexus in the time of Covid-19, BIS Bulletin, No. 13.  Google Scholar
  110. Huang, W./Takács, E. (2020b): Model risk at central counterparties: Is skin-in-the-game a game changer?, BIS Working Paper No. 866.  Google Scholar
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  116. Morkötter, S./Pleus, J./Westerfield, S. (2012): The Impact of Counterparty Risk on Credit Default Swap Pricing Dynamics, The Journal of Credit Risk, Vol. 8(1), 66–83.  Google Scholar
  117. Nabilou, H./Asimakopoulos, I. G. (2020): In CCP we trust … or do we? Assessing the regulation of central clearing counterparties in Europe, CMLJ, Vol. 15(1), 70–97.  Google Scholar
  118. Norman, P. (2011): The Risk Controllers. Central Counterparty Clearing in Globalised Financial Markets (Wiley).  Google Scholar
  119. Paddrik, M./Zhang S. (2020): Central Counterparty Default Waterfalls and Systemic Loss, Office of Financial Research Working Paper 20-04, https://www.financialresearch.gov/working-papers/files/OFRwp-20-04_central-counterparty-default-waterfalls-and-systemic-loss.pdf.  Google Scholar
  120. Paech, P. (2016): The Value of Financial Market Insolvency Safe Harbours, OJLS, Vol. 36, (4), Winter 2016, 855–884.  Google Scholar
  121. Panetta, F. (2020): Joining forces: stepping up coordination on risks in central clearing. Introductory remarks at the Second Joint Bundesbank/ECB/Federal Reserve Bank of Chicago Conference on CCP Risk Management, https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp200226~e33a0d0c1c.en.html.  Google Scholar
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  123. Rehlon, A./Nixon, D. (2013): Central counterparties: What are they, why do they matter and how does the Bank supervise them?, Bank of England Quarterly Bulletin 2013 Q2, 147–156.  Google Scholar
  124. Sayah, M. (2017): Counterparty Credit Risk in OTC Derivatives under Basel III, Journal of Mathematical Finance, 7, 1–38.  Google Scholar
  125. Singh, M./Turing, D. (2018): Central Counterparties Resolution – An Unresolved Problem, IMF Working Paper WP/18/65 6.  Google Scholar
  126. Steigerwald, R. S. (2015): Central counterparty clearing and systemic risk regulation. In Malliaris, A. G./Ziemba, W. T. (eds.): The world scientific handbook of futures markets, 181–246. Singapore: World Scientific.  Google Scholar
  127. Swan, E. (2000): Building the Global Market: A 4000 year history of derivatives (Kluwer).  Google Scholar
  128. Weber, M. (2016): Central Counterparties in the OTC Derivatives Market from the Perspective of the Legal Theory of Finance, Financial Market Stability and the Public Good. Eur Bus Org Law Rev (2016) 17, 71–103.  Google Scholar
  129. Wendt, F. (2015): Central Counterparties: Addressing their Too Important to Fail Nature. IMF Working Paper No. 15/21.  Google Scholar
  130. Xiao, T. (2019): Pricing Interest Rate Swap Subject to Bilateral Counterparty Risk, MPRA Paper No. 94233.  Google Scholar

Abstract

After the prudential requirements introduced by EMIR in 2012, the European Union took a further step when it adopted a regulation in 2021 on the framework for the recovery and resolution of central counterparties. The regulation is based on the bank recovery and resolution directive of 2014. This paper provides a critical overview of the new regulation by focusing on the question of whether the bank resolution tools are useful and effective in the case of central counterparty resolutions.