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CCP regulations pose challenges for both CCPs and regulators

Given the focus on central counterparty (CCP) clearing in the post-financial crisis world, it is no surprise that clearing houses today face more scrutiny from regulators and central banks than ever before. For example, the Canadian Derivatives Clearing Service (CDCS) offered by CDCC was recently designated by the governor of Bank of Canada as subject to ongoing regulatory oversight by the bank under the Payment Clearing and Settlement Act (PCSA), effective April 30, 2012, making it one of the only four systems that are designated by Bank of Canada as subject to PCSA.[1] 

However, given the complicated legal entity and organizational structure of CCPs, regulating and providing oversight of clearing corporations can be challenging as different subsidiaries tend to fall into different jurisdictions and are subjected to different regulatory bodies. In addition, given the different products cleared, CCPs can be subject to product-specific regulations.

From a regional perspective, in Europe, clearing houses with entities located or business conducted in the U.K. are regulated by the Financial Services Authority (FSA), with payment systems overseen by the Bank of England. Examples include LCH.Clearnet Limited, CME Europe and ICE Europe. Entities located or incorporated in other jurisdictions are subject to other European regulators. For example, Eurex Clearing is a company incorporated in Germany and licensed as a credit institution under supervision of the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) pursuant to the Banking Act (Gesetz für das Kreditwesen). In the United States, clearing houses such as FICC and LCH.Clearnet LLC are registered and regulated by the Securities and Exchange Commission (SEC).

From a product perspective, recently, the U.S. Commodity Futures Trading Commission (CFTC) required any clearing house that seeks to provide clearing services with respect to futures contracts, options on futures contracts or swaps must register with the CFTC as a derivatives clearing organization (DCO) before it can begin providing such services. As a mandate to implement the Dodd-Frank Act, this requirement not only affects clearing houses in the U.S. but also in the rest of the world. Most clearing houses are registered or applying to be registered with the CFTC now, including CME Clearing U.S., Eurex Clearing, LCH.Clearnet and ICE Clear (U.S., Europe and Credit).[2]  

For clearing houses, the complexity in complying with different regulations across the world can be taxing. For regulators, the intricate structure of global clearing houses poses challenges in applying appropriate oversight.

Have you faced challenges in complying with or overseeing CCP regulations?

Next week, the CCP blog series will discuss the products and services CCPs offer and how CCPs operate, particularly their risk management practices.

[1] The other three systems include The Large Value Transfer System (LVTS), CDSX and CLS Bank.

[2] Interestingly, CME Europe requested to vacate the registration in December 2011 and was vacated by the CFTC in March 2012. This will be a topic for another discussion.


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