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Mr. John Kiff, Alessandro Gullo, Mr. Cory Hillier, and Panagiotis Papapanagiotou
Back in 2009, G-20 leaders have called for all standardized over-the-counter (OTC) derivatives to be cleared through central counterparties (CCPs). By now, 18 of the 24 Financial Stability Board (FSB) member jurisdictions have provided for mandatory central clearing frameworks in place, covering at least 90 percent of all standardized OTC derivatives in their jurisdictions. However, the authorities in several countries remain confronted with the hows and wherefores of mandatory central clearing, also in light of the international dimension of OTC derivatives contracts. This paper examines the policy options available to countries that have yet to fully conform to the clearing mandate, centered on the setup of local CCPs or on the use of foreign CCPs, and elaborates on their feasibility, risks and benefits from an economic, legal and tax viewpoint.
Mr. John Kiff, Alessandro Gullo, Mr. Cory Hillier, and Panagiotis Papapanagiotou

to countries in mandating central clearing for certain classes of OTC derivatives, including financial stability, legal and tax implications. These options are available upon implementation of the clearing mandate or thereinafter, and/or the implementation of bank capital requirements for non-centrally cleared derivatives, depending on the development and features of the financial system in a jurisdiction. After an overview of the current state of play, attention will be given to countries where authorities face special challenges in determining which products to

Mr. John Kiff, Alessandro Gullo, Mr. Cory Hillier, and Panagiotis Papapanagiotou

Copyright Page © 2022 International Monetary Fund WP/22/14 IMF Working Paper LEG, MCM Applying the Central Clearing Mandate: Different Options for Different Markets Prepared by John Kiff, Alessandro Gullo, Cory Hillier, and Panagiotis Papapaschalis * † Authorized for distribution by Dong He and Yan Liu January 2022 IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate . The views expressed in IMF Working Papers are those of the author(s) and do not necessarily

Mr. John Kiff

conditions to be cleared centrally rather than bilaterally. Central clearing may also make it easier to report derivatives transactions to trade repositories, which collect and record the details of over-the-counter derivatives trades. (The G20 also called for reporting of over-the-counter derivatives transactions to trade repositories.) The availability of these records can help regulators and financial stability authorities detect the buildup of dangerous risk exposures and potential ripple effects if a counterparty defaults. The central clearing mandate focuses on

Alessandro Gullo

Central clearing counterparties (CCPs) have played a longstanding role in financial markets. However, their systemic importance has been amplified by the reforms promoted in response to the global financial crisis, such as the “central clearing mandate” agreed upon at the Group of Twenty Pittsburgh summit in September 2009. In that summit, it was decided that all standardized, over-the-counter (OTC) derivatives contracts should be traded on exchanges or electronic trading platforms, when appropriate, and cleared through CCPs. To implement this policy commitment

Mr. Manmohan Singh and Dermot Turing
Recovery and resolution regimes are being developed for central counterparties (CCPs). We analyse current resolution tools in the context of policy, which is to restore the critical functions of a failed CCP. We conclude that the toolkit is insufficient to avoid the costs of resolution being borne by taxpayers, and propose alternative policy suggestions for addressing the problem of a failed CCP.
Mr. Manmohan Singh and Dermot Turing

rather than a local basis (not along the lines proposed in the draft European Union (EU) Regulation) 24 —in other words, the bilateral clearing option, or portability, or other alternatives should not be precluded; 25 (b) automatically cancelling the clearing mandate for products where a CM default has blown through the default fund layer of the loss waterfall for the product concerned, regardless of whether there was a “recovery” or “resolution” of any CCP that cleared the product, and not reinstating the mandate until the causes of risk management failure have been

Mr. Manmohan Singh

). Adjusting for a re-use rate of between 2 and 3, collateral that is in in-the-money positions may be in the order of US$700–900 billion (Singh 2013) . 9 These estimates are similar on magnitude to the figures reported in the financial statements of the top 10–15 banks active in OTC derivatives market. 10 Thus, the sizable under-collateralization in the OTC derivatives market which should manifest itself in the waterfalls of the CCP world. However, under-collateralization in this market since Lehman remains in the US$3–5 trillion range (BIS, 2014) . As the clearing

Mr. Manmohan Singh
Nonbanks such as central counterparties (CCPs) are a useful lens to see how regulators view the role of the lender-of-last-resort (LOLR). This paper explores the avenues available when a nonbank failure is likely, specifically by considering the options of keeping CCPs afloat. It is argued that CCPs have, by regulatory fiat, become “too important to fail,” and thus the imperative should be greater loss-sharing by all participants that better align the distribution of risks and rewards of CCPs, the clearing members and derivative end-users. In the context of LOLR, the proposed variation margin gains haircut (VMGH) is discussed as a way of limiting the taxpayer put.
International Monetary Fund. Monetary and Capital Markets Department
There has been a very smooth post-Brexit transition, with no material disruption nor any crystalized financial stability risks. This was the result of the U.K. authorities’ (and in some cases the EU authorities) and firms’ extensive preparations. The U.K. authorities have been proactively engaging with the industry, monitored risks, and consistently provided necessary legal certainty in a timely manner. This approach should continue, to the extent that any risks and uncertainties from Brexit remain.