In a recent article from the Bank of England, CCP concentration and cross boarder risk is acknowledged as a challenge derived from the regulatory push into central clearing. Seeking to addressing systemic risk created new ones.
With central clearing recognised as a key way to manage systemic risk, G20 leaders agreed to reform the structure of OTC derivatives markets, requiring certain vanilla contracts be centrally cleared. Over the last few years global markets either have, or are moving to this ‘clearing obligation’ for certain conforming contracts.
In managing risk within the financial system, CCPs do however concentrate risk within themselves. This will become an increasingly important consideration, since there is likely to be further migration towards central clearing, and more concentration of activity among a small number of CCPs and their users.
Regulators around the world are trying to address the increased concentration and cross-border nature of central clearing activity, by working together to ensure consistency of approach across jurisdictions based on robust regulatory standards.
Market fragmentation may result if rules are not applied consistently in the different jurisdictions in which CCPs and their participants operate. Authorities also need to ensure that mechanisms are in place to mitigate the risk arising from extreme circumstances in which CCPs could experience financial or operational difficulties.
Overall, while there has been significant progress in improving the robustness of OTC derivatives markets over the past five years, however there is work still to do.
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