The Future of Centrally Cleared OTC Derivatives Markets

Abstract

Financial markets are in constant flux. New players and services, often leveraging new technology, emerge and challenge the status quo. Changes in markets, regulation, the environment, and global politics affect the business and risk profiles of financial market participants. The central clearing sector is no exception to this. Moreover, with its crucial position as bulwark against systemic instability, the central clearing sector sits at the heart of modern financial markets and is particularly exposed to the speed of the ever-evolving financial system. Based on recent evolutions and policy initiatives, this paper aims to formulate conjectures about the directions in which centrally cleared over-the-counter (OTC) derivatives markets may develop in the future. Given the inherently forward-looking nature of this paper, our analysis is necessarily limited in that it employs incomplete information about the future in an attempt to map future risks, challenges, and opportunities in centrally cleared OTC derivatives markets. The paper is structured around (i) emerging risks (cyber risk, environmental risk, new technologies, and legal risk); (ii) challenges that come with the friction between an increasingly cross-border market for centrally cleared OTC derivatives and a regulatory and supervisory approach towards CCPs that has remained largely domestic or regional; and (iii) potential future directions for CCP governance.

JEL Classification: K22, G15, G23, G28