Disentangling derivatives: international policy reforms concerning central counterparties

ABSTRACT

After the 2008 financial crisis, international policy reforms were adopted on various aspects of derivatives markets, highlighting the need for precise and consistent rules. We examine the making of international rules concerning the resilience, recovery and resolution of central counterparties (CCPs), which form acritical global financial infrastructure. We argue that regulators played an important role in setting relatively precise and consistent international standards on CCPs over time. Facing common challenges, such as market fragmentation and interlinkages between issues, fostered a problem-solving approach in transgovernmental networks. We also identify the policy coordination tools used by regulators.

KEYWORDS:

• derivatives
• finance
• clearing houses
• central counterparties
• international standards

Disclosure conflicts of interest statement

No potential conflict of interest was reported by the author(s).

Notes

1. A derivative is a contract between two or more parties, the value of which is derived from an underlying asset, such as bonds, currencies, interest rates, or commodities. Derivative contracts can be standardised and traded over an exchange, or they can be traded directly between two parties, these are called over-the-counter derivatives (OTCDs). In the decade prior to the crisis, there was a massive growth in the use of OTCD, such as interest-rate and credit default swaps.

2. Private standard setters, such as the International Swaps and Derivatives Association (ISDA) were also involved, but this paper focuses on public standard setters.

3. We wish to thank an anonymous reviewer for raising these points.