OTC Derivatives and the ‘Competitive Payments System’ Debate: The Lessons from History and Implications for a Supervisory Framework

G20 leaders vowed to collect and share OTC derivatives trade data so that regulators can obtain a global picture of market and risk evolution. This chapter employs a network perspective to explain why they have failed to meet this commitment to date. It examines three networks: the OTC derivatives market itself, and those of its private and public governance. The analysis shows that the Financial Stability Board (FSB), the public supervisory entity, struggles to establish itself at the center of the global regulatory network. It failed to act as a first mover in setting global trade identification standards (legal entity identifiers), and it has not been able to establish a core of global data warehouses. This is largely the result of unilateral action by FSB members. In particular, legislators in member countries have undermined FSB-led efforts by refusing to remove legal barriers to transnational regulatory cooperation and, in some instances, by erecting new ones.

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The Politics and Practices of Central Clearing in OTC Derivatives Markets

10.1093/oso/9780190864576.003.0007 ◽

2018 ◽

Author(s):

Erin Lockwood

Keyword(s):

Financial Markets ◽

Unintended Consequences ◽

Regulatory Change ◽

Significant Shift ◽

Risk Modeling ◽

Risk Models ◽

Over The Counter ◽

Otc Derivatives ◽

Derivatives Markets ◽

Policy Shifts

This chapter focuses on the unintended consequences of the post-crisis mandate that over-the-counter (OTC) derivatives be cleared through centralized clearinghouses in an effort to reduce counterparty and systemic risk. Although central clearing has been widely implemented, it has reproduced many of the same characteristics of financial markets that contributed to the 2008 crisis: concentrated risk, moral hazard, and a reliance on faulty risk models. What accounts for the recalcitrance of the OTC derivatives market to a regulatory change? The chapter argues that focusing on the technologies and practices used to govern derivatives markets helps explain the absence of more radical regulatory policy shifts in derivatives regulation. Although there has been a significant shift in who regulates OTC markets, much less has changed at the level of the specific practices that govern these markets, and the chapter examines the continued reliance on netting, collateralization, and risk modeling within clearinghouses.

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