Mandatory clearing: the infrastructural authority of central counterparty clearing houses in the OTC derivatives market

Abstract

This study examines the role of central counterparty clearing houses (CCPs) in the over-the-counter (OTC) derivatives market. To achieve this goal, this paper introduces the notion of infrastructural authority. The notion of infrastructure, borrowed from Science and Technology Studies, is employed to locate a form of private authority stemming from how power and legitimacy are exercised by enabling the performance of specific functions in financial markets. As OTC derivatives had become widely discredited after the crisis, regulators had come under strong pressure to reform what had grown to be a systematically important segment of the global financial system. G20 leaders thus responded in 2009 by pledging to make the central clearing of standardized OTC derivatives mandatory to improve financial stability. Therefore, this study argues that the infrastructural authority of CCPs is politically contingent, originating from the statutory requirement of mandatory clearing in the OTC market. However, by reviewing specific moments in financial history, this study concludes that the infrastructural authority of CCPs may actually destabilize financial markets, undermining the G20’s original intent to strengthen systemic stability. More generally, the research conducted in this study provides evidence of the changing nature of authority in financial markets following the 2007–2008 financial crisis.

Keywords:

• OTC derivatives
• financial crisis
• CCP
• global governance
• private authority
• financial reform
• financial market infrastructure
• G20
• central counterparty clearing house
• infrastructural authority

Acknowledgment

Previous drafts of this manuscript were presented in May 2017 at the ‘The Changing Technological Infrastructures of Global Finance’ workshop at the Balsillie School of International Affairs, and in June 2017 at the ‘89th Canadian Political Science Association Annual Conference’ at Ryerson University. In addition to thanking the attendees of both events, I am grateful to Dr. Malcolm Campbell-Verduyn and Dr. Nicholas Bernards for their excellent job as special issue editors, as well as to the anonymous journal reviewers for the extremely helpful comments. I would also like to acknowledge Prof. Matthew Watson, Prof. Ben Clift, Prof. Eric Helleiner and Dr. Irene Spagna for feedback provided during the article’s development.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 Available at: http://www.cmegroup.com/company/membership/clearing/otc.html

2 The process of standardization makes specific classes of OTC derivatives uniform on legal, processing, and product levels, in order to facilitate central clearing.

Additional information

Notes on contributors

Lorenzo Genito

Lorenzo Genito has recently received his PhD from the Politics and International Studies Department of the University of Warwick. His PhD, entitled 'What Markets Fear: Understanding the European Sovereign Debt Crisis Through the Lens of Repo Market Liquidity', examines the role of CCPs in the euro-denominated repo market during the European sovereign debt crisis.