Avoiding Armageddon: Resolution Regimes for Central Clearing Counterparties

The September 2009 resolutions of the G20 nations at their Pittsburgh summit, as to the compulsory centralised clearing of standardised over-the-counter (OTC) derivatives, paved the way for the creation of some of the biggest too-big-to-fail institutions the financial system has ever contained. Central clearing of securities and financial contracts is nothing new, but this corralling of OTC derivatives gives central clearing counterparties (CCPs) a new prominence and the resulting concentration of counterparty risk has necessitated new, more robust prudential requirements for CCPs.

As a result, in April 2012, the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organisation of Securities Commissions (IOSCO) published the final version of their principles for financial market infrastructures (FMIs), as well as their proposed disclosure framework and assessment methodology in December 2012. These principles cover CCPs, as well as systemically important payment systems, central securities depositories, securities settlement systems and trade repositories, although this alert focuses on the provisions relating to CCPs.

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