Central Counterparty Clearing Sample Clauses

Central Counterparty Clearing. Since the 2007/2008 Global Financial Crisis, and in accordance with the 2009 G20 Pittsburgh Summit,138 an increasing number of jurisdictions, including the EU, require “all standardised OTC derivatives contracts to be cleared… [and settled] through a” central counterparty (“CCP”).139 Commentators often argue that because “derivatives contracts… are systemically risky and, indeed, were a cause of the financial crisis”, mandatory CCP clearing is justified as a means to reduce systemic risk.140 In particular, the existing CCP regulatory frame- work under EMIR consists of various measures explicitly designed to reduce systemic risk, namely “prudential requirements” including liquidity and capital requirements, initial and variation margins and mechanisms for loss shar- ing.141 Significantly, as a way to reduce systemic risk, “mitigating procyclical- ity of margin requirements in derivatives transactions has been a major policy objective in regulating CCPs”.142 However, it should also be noted that manda- tory CCP clearing is not a watertight solution. In fact, there is “clear consensus in the financial markets that CCPs do not eliminate risk, they just reallocate it and most likely centralize it” leading to CCPs themselves becoming the main hub for risk.143 4.1.1 Defining ‘clearing’, ‘settlement’ and a ‘CCP’ A ‘CCP’ is typically a well-capitalised entity “that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer” – thus ensuring the 138 G20 Leaders’ Statement (n 16). 139 The definition of a ‘CCP’, ‘clearing’ and ‘settlement’ will be analysed in greater detail below. See also, Recitals 5 and 98 of EMIR. In addition, the USA impose mandatory CCP clearing on certain transaction through Title VII of the 2010 Xxxx-Xxxxx Xxxx Street Reform and Consumer Protection Act. 140 X X Xxxxxxxx, “Central Clearing of Financial Contracts: Theory and Regulatory Implications” (2019) 167 (6) University of Pennsylvania Law Review 1327 at 1330-1333. 141 See generally, Articles 16 and 40-50 EMIR. 142 These risk mitigation methods will be discussed in greater detail below. See also, X Xxxxxxx and X X Xxxxxxxxxxxxx, “In CCP we trust… or do we? Assessing the regulation of central clearing counterparties in Europe” (2020) 15 (1) Capital Markets Law Journal 70 at 71. 143 These risks will be discussed in greater detail below. See also, Xxxxxxx and Xxxxxxxxxxxxx (n 142) 70 at 77. perfo...